In a representative agent model with time-separable CRRA preferences, under the assumption of log-normal and homoskedastic consumption and equity returns, the equity risk premium can be written as:
where is log (gross) real equity return, is log (gross) real risk-free return, 𝛾 is the relative risk aversion parameter, Δ𝑐 is real per capita consumption growth and is the variance of real risky log returns?