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Robustness, the Spirit of Capitalism and Asset Pricing

Gaowang Wang () and Juanjuan Yan ()
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Juanjuan Yan: Central University of Finance and Economics

Economics Bulletin, 2016, vol. 36, issue 4, 1892-1903

Abstract: This paper examines how a preference for robustness affects optimal consumption-portfolio rules as well as the equilibrium asset returns when investors care about their social status (or they have the spirit of capitalism). It is shown that the interaction of these two preferences leads to higher equity premium by enhancing the investor's effective risk aversion and making them more conservative in risk-taking. In addition, we find that they also lead to greater precautionary savings and lower risk-free rate in general equilibrium. We then show that the interaction of the two preferences has the potential to resolve the equity premium puzzle and the risk-free rate puzzle for plausible parameter values.

Keywords: the Spirit of Capitalism; Robustness; the Equity Premium Puzzle; the Risk-free Rate Puzzle (search for similar items in EconPapers)
JEL-codes: G1 D8 (search for similar items in EconPapers)
Date: 2016-10-05
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