The equity premium and the risk free rate: A cross country, cross maturity examination

This paper examines the relationship between the equity premium and the risk free rate at three different maturities using post 1973 data fora panel of 7 OECD countries. We show the existence of subsample instabilities,of some cross country differences and of inconsistencies with the expectations theory of the term structure. We perform simulations using a standard consumptionbased CAPM model and demonstrate that the basic features of Mehra and Prescott's(1985) puzzle remain, regardless of the time period, the investment maturity and the country considered. Modifications of the basic setup are also considered.

On the sources of business cycles in the G-7

This paper examines sources of cyclical movements in output, inflation and the term structure of interest rates. It employs a novel identification approach which uses the sign of the cross correlation function in response to shocks to catalog orthogonal disturbances. We find that demand shocks are the dominant source output, inflation and term structure fluctuations in six of the G-7 countries. Within the class of demand disturbances, nominal shocks are dominant, but their importance declined after 1982. Furthermore, there are no significant differences in the proportion of term structure variability explained by different structural sources at different horizons.

Stock returns, term structure, inflation and real activity: An international perspective

This paper analyses the empirical interdependences among assetreturns, real activity and inflation from a multicountry and internationalpoint of view. We find that nominal stock returns are significantly relatedto inflation only in the US, that the US term structure of interest ratespredicts both domestic and foreign inflation rates while foreign termstructures do not have this predictive power and that innovations in inflationand exchange rates induce insignificant responses of real and financialvariables. An interpretation of the dynamics and some policy implicationsof the results are provided.