its equilibrium price dropped the higher the premium over risk-free bonds would rise. Holmstrom and Tirole in their studies developed another role for liquidity in the equity market that involved firms willing to pay a premium for bonds over private claims when they would be facing uncertainty over liquidity needs. Tax distortions Another explanation related to the observed growing equity premium was argued by McGrattan and Prescott (2001) 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. 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. Implied volatility Graham and Harvey have estimated that, for the United States, the expected average premium during the period June 2000 to November 2006 ranged between 4.65 and 2.50. They found a modest correlation of 0.62 between the 10-year equity premium and a measure of implied volatility (in this case VIX, the Chicago Board Options Exchange Volatility Index). Information derivatives The simplest scientific interpretation of the puzzle suggests that consumption optimization is not responsible for the equity premium. More precisely, the timeseries of aggregate consumption is not a leading explanatory factor of the equity premium. The human brain is (simultaneously) engaged in many strategies. Each of these strategies has a goal. While individually rational, the strategies are in constant competition for limited resources. Even within a single person this competition produces a highly complex behavior which does not fit any simple model. Nevertheless, the individual strategies can be understood. In finance this is equivalent to understanding different financial products as information derivatives i.e. as products which are derived from all the relevant information available to the customer. If the numerical values for the equity premium