# Equity Premium in Jermann 1998 and Otherwise

Dear Jake,

I didn’t look the mod file you are referring to or try to understand the issue in your opening post, but clearly here the problem is where you put the conditional expectation. Dynare applies the conditional expectation on the whole equation. So if you write something like:

x = 1/m(1);


x_t = \mathbb E\left [\frac{1}{m_{t+1}}\right]

while in your case you want:

x_t = \frac{1}{\mathbb E\left [m_{t+1}\right]}

which is quite different… To do that, or more generally to define a conditional expectation inside a nonlinear expression, you have to use an auxiliary variable. In the model block, you need to write instead something like:

z = m(1);
x = 1/z;


This is the rational for the fix you found yourself. As soon as the model is nonlinear, it is very important to be very carful how you write the equations in the mod file. Two equivalent expressions in a deterministic model can lead to very different outcomes in a stochastic model.

Best,
Stéphane.