The Equity Premium Puzzle and the Riskfree Rate Puzzle

Philippe Weil

No 2829, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the implications for general equilibrium asset pricing of a recently introduced class of Kreps-Porteus non-expected utility preferences, which is characterized by a constant intertemporal elasticity of substitution and a constant, but unrelated, coefficient of relative risk aversion. It is shown that the solution to the "equity premium puzzle" documented by Mehra and Prescott [19851 cannot be found, for plausibly calibrated parameter values, by simply separating risk aversion from intertemporal substitution. Rather, relaxing the parametric restriction on tastes implicit in the time-addictive expected utility specification and adopting Kreps-Porteus preferences in the direction of "more realism" is likely to add a "riskfree rate puzzle" to Mehra's and Prescott's "equity premium puzzle."

Date: 1989-01
Note: ME
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Citations: View citations in EconPapers (323)

Published as "The Equity Premium Puzzle and the Risk-Free Rate Puzzle", Journal of Monetary Economics, Vol. 24, no. 3 (1989): 401-422.

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Related works:
Working Paper: The Equity Premium Puzzle and the Risk-Free Rate Puzzle (1997)
Journal Article: The equity premium puzzle and the risk-free rate puzzle (1989)
Working Paper: The Equity Premium Puzzle and the Riskfree Rate Puzzle (1989)
Working Paper: The Equity Premium Puzzle and the Riskfree Rate Puzzle (1989)
Working Paper: The Equity Premium Puzzle and the Riskfree Rate Puzzle (1989)
Working Paper: The Equity Premium Puzzle and the Riskfree Rate Puzzle (1989)
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