Revisiting the Equity Premium Puzzle: Time Series Analysis and Forecasting from 1990 to 2012

This paper explores the enduring equity premium puzzle (EPP), which questions why investors exhibit a lower demand for risky assets compared to risk-free alternatives despite the significantly higher expected returns on equities. By analyzing historical data from 1990 to 2012, I estimate the equity premium to range between 3.4% and 5.2%. Utilizing time series models, specifically ARIMA and GARCH, I forecast the equity premium and find that it is projected to fall between 1.2% and 3.8%. This study highlights the complexities surrounding investor behavior and market dynamics, providing insights into the factors influencing risk-taking in financial markets. The findings contribute to a deeper understanding of the EPP and offer a quantitative framework for analyzing equity returns in relation to risk.