Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data

Aude Pommeret and Anne Epaulard

No 2001/117, IMF Working Papers from International Monetary Fund

Abstract: This paper aims to measure the risk premium on French equities during 1960-92 and to evaluate how well theoretical models based on various representations of agents' preferences can explain it. Aside from the standard, time-additive utility function with constant relative risk aversion, three other utility functions are reviewed: a recursive utility function, a habit formation utility function, and a utility function that accounts for the interdependence of preferences. Both calibration and econometric estimations show that none of the studied marginal changes in the representation of agents' preferences are sufficient to solve both the equity premium puzzle and the risk-free rate puzzle.

Keywords: WP; utility function; growth rate; rate of return; Equity premium puzzle; risk-free rate puzzle; Euler equation; equity premium; econometric estimation; consumption-saving trade-off equation; consumption-risk aversion; Consumption; Stocks; Tax allowances; Estimation techniques; Treasury bills and bonds (search for similar items in EconPapers)
Pages: 36
Date: 2001-08-01
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Citations: View citations in EconPapers (3)

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