New Solution For The Equity Premium Puzzle

The hump-shaped life-cycle consumption pattern in the household level solves the equity premium puzzle, by introducing more variance both in consumption in the household level comparing to aggregated macro data and through the varying time-discounting factor rendered by the hump-shaped curve. To provide test of the hypothesis empirically I constructed a long household-level Panel data (1980-2008) to estimate beta and gamma in the C-CAPM model. The panel based on PSID (Panel Study of Income Dynamics) and CEX (Consumer Expenditure Survey). I have reduced the gamma from 103 to near 20 and finally to 2.54 step by step, which is a significant progress.