Paper: arXiv 2602.11687

Authors: Atilla Aras

Abstract

This article’s aim is to provide the solution to the equity premium puzzle without using calibrated values. Calibrated values of subjective time discount factor were used in my prior derived models because 4 variables were determined from 3 different equations. Furthermore, calculated values and risk behavior determination of my prior models were compatible with empirical literature. 4 unknown variables are now calculated from 4 different equations in the new derived model in this article. Subjective time discount factor and coefficient of relative risk aversion are found 0.9581 and 1.0319, respectively from the system of equations which are compatible with empirical studies. Micro and macro studies about CRRA value affirm each other for the first time in the literature. Furthermore, equity and risk-free asset investors are pinned down to be insufficient risk-loving, which can be considered a type of risk-averse behavior. Hence it can be said that calculated values and risk attitude determination align with empirical literature. This shows that derived model is valid and make CCAPM work without calibration.

Complexity vs Empirical Score

  • Math Complexity: 5.0/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper attempts to solve the Equity Premium Puzzle using a 4-equation system for 4 unknowns to eliminate calibration, building on the author’s prior CCAPM modifications. However, the empirical rigor is weak as it relies on simple moment matching over historical US data (1889-1978) without robust out-of-sample backtesting, statistical validation, or complete reporting of tabular results in the excerpt.

Research Flowchart

  flowchart TD
    A[Goal: Solve Equity Premium Puzzle Without Calibration] --> B[Identify 4 Unknown Variables: Time Discount Factor & CRRA]
    B --> C[Construct System of 4 Deterministic Equations]
    C --> D[Solve System of Equations Simultaneously]
    D --> E[Outcome 1: Time Discount Factor = 0.9581]
    D --> F[Outcome 2: CRRA = 1.0319]
    E & F --> G[Key Finding: Micro/Macro CRRA Unified & CCAPM Validated Without Calibration]