自從Mehra and Prescott (1985)提出 “Equity Premium Puzzle”之後，許多學者開始去探討這樣的現象以及後續衍生出來的問題(risk-free rate puzzle)。資產定價理論告訴我們，要精確地估計出資產價格需要有正確的折現率以及未來的現金流量。但是，學者往往只從某一角度去探討Equity Premium Puzzle，因此本文希望以Habit formation估計出正確的折現率以及假設消費與股利不相同下估計未來現金流量去解釋為何有這麼高的超額報酬。同時，我們也發現 surplus consumption ratio 的跳躍項對於這些問題的解釋能力將非常的強。

Since the equity premium puzzle was identified by Mehra and Prescott (1985), many papers in this literature has started to discuss this phenomenon and the subsequent problem- risk-free rate puzzle. In accordance with standard asset-pricing theory, if we want to estimate precisely asset prices, it’s necessary for us to calculate correctly the appropriate discount factor and the future cash flow. Unfortunately, many scholars often discuss the equity premium puzzle from the only one viewpoint. Therefore we apply habit formation model to estimate the discount factor and model the cash flow by allowing aggregate dividends to differ from aggregate consumption.
In benchmark scenario, we also show that the jump in surplus consumption ratio plays a critical role in expounding the equity premium puzzle and the risk-free rate puzzle.

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