Time Preference and the 'Equity Premium Puzzle

Simon Benninga and Aris Protopapadakis

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We re-examine the Mehra and Prescott (1985) model. Allowing the time preference factor to be greater than one resolves the "equity premium puzzle." We show that this solution is consistent with finite expected utility and a positive risk-free rate of interest. For somewhat higher values of consumption variance, it is possible to get time preference factors less than one.

Date: 1989-03-01
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