Risk Weighted Utility Theory as a Solution to the Equity Premium Puzzle

Thierry Chauveau and Nicolas Nalpas
Additional contact information
Thierry Chauveau: TEAM - Université Paris 1 and CDC-Marchés
Nicolas Nalpas: TEAM - Université Paris 1

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: In this paper, we formulate a restatement of the theory of choice under uncertainty. As an alternative to the rank-dependent expected utility model, we develop a probability-altering theory in which the transformation of probabilities is weighted by the centered outcome of the lottery which may be viewed as "pure" risk. Using a weak restriction on the changes of probability measure, we avoid stochastic dominance inconsistency. We examine the main effects of this new approach on financial market equilibrium, especially in terms of Euler stochastic equations. Using such an approach allows for accounting for both high equity risk premia and low risk free rates without unrealistic assumptions upon the values of parameters characterizing the behaviour of the representative consumer

Keywords: probability transformation function; CAPM; equity premium puzzle (search for similar items in EconPapers)
JEL-codes: D81 D91 G12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 1999-08
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://shs.hal.science/halshs-03591443 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:bla99020

Access Statistics for this paper

More papers in Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1) Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Label ().