Informational Asymmetry and Market Imperfections:

　　This paper develops an equilibrium asset pricing model to explain the equity premium puzzle and the risk-free rate puzzle by allowing for both market frictions and informational asymmetry. The paper argues that much of the high equity premium in the Mehra and Prescott(1985) sample period can be explained by informaitonal asymmetry among investors and inability of many investors to diversify their portfolios. With admissible relative risk aversion coefficient r, the model matches various key statistics quite well. The paper implies that with the development of mutual funds, the equity premiun should decline as has been the case since the 1950s.