Exact Value Solution to the Equity Premium Puzzle

Battle Count: 70

The paper is primarily a theoretical asset pricing contribution addressing the equity premium puzzle. It does not propose trading strategies, signal generation, or direct quantitative trading applications. However, understanding investor risk behavior classification and the exact CRRA/STDF values could inform risk parameter estimation in portfolio construction. The model is more relevant to academic finance and policy than to practical algorithmic trading.

The core computation involves solving a system of 4 nonlinear equations with 4 unknowns using MATLAB, which is straightforward. However, understanding the theoretical framework (SFOM, dynamic programming derivation, lognormal distribution assumptions) requires significant background in consumption-based asset pricing. The derivation of equations (especially Eq. 3 in the Appendix) involves non-trivial algebraic manipulation of lognormal covariance terms. Replication requires access to the specific historical dataset and MATLAB.

Data and replication package available at Harvard Dataverse (https://doi.org/10.7910/DVN/KW5D7S). MATLAB is used for solving the equation system. However, the paper is single-authored, uses a proprietary tool (MATLAB) without specifying exact code, and the theoretical framework is novel and not yet peer-reviewed. The derivation steps are partially referenced to prior works (Aras 2022, 2024, 2025) rather than fully self-contained.