Editing Equity premium puzzle (section)

=== Tax distortions ===

Another explanation related to the observed growing equity premium was argued by McGrattan and Prescott (2001)<ref>{{cite report |last1=McGrattan |first1=Ellen |last2=Prescott |first2=Edward |title=Taxes, Regulations, and Asset Prices |date=December 2001 |doi=10.3386/w8623 |doi-access=free |website=National Bureau of Economic Research}}</ref> to be a result of variations over time of taxes and particularly its effect on interest and dividend income. It is difficult however to give credibility to this analysis due to the difficulties in calibration utilised as well as ambiguity surrounding the existence of any noticeable equity premium before 1945.<ref>{{cite report |last1=Mehra |first1=Rajnish |title=The Equity Premium: Why is it a Puzzle? |date=February 2003 |doi=10.3386/w9512|doi-access=free |website=National Bureau of Economic Research}}</ref> Even given this, it is evident that the observation that equity premium changes arising from the distortion of taxes over time should be taken into account and give more validity to the equity premium itself.

Related data is mentioned in the Handbook of the Equity Risk Premium. Beginning in 1919, it captured the post-World War I recovery, while omitting wartime losses and low pre-war returns. After adding these earlier years, the arithmetic average of the British stock premium for the entire 20th century is 6.6%, which is about 21/4% lower than the incorrect data inferred from 1919-1999.<ref>{{Cite book |last1=Dimson |first1=Elroy |last2=Staunton |first2=Mike |last3=Marsh |first3=Paul |title=Handbook of the Equity Risk Premium |date=9 November 2007 |publisher=Elsevier Science |isbn=9780444508997 |url=https://www.sciencedirect.com/book/9780444508997/handbook-of-the-equity-risk-premium }}{{page needed|date=July 2021}}</ref>