The Equity Premium Puzzle and the Riskfree Rate Puzzle
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Philippe Weil: Observatoire français des conjonctures économiques
Sciences Po publications from Sciences Po
This paper studies the implications for general equilibrium asset pricing of a class of Kreps-Porteus nonexpected utility preferences characterized by a constant intertemporal elasticity of substitution and a constant, but unrelated, coefficient of relative risk aversion. It is shown that relaxing the parametric restriction on tastes imposed by the time-additive expected utility specification does not suffice to solve the Mehra-Prescott (1985) equity premium puzzle. An additional puzzle — the risk-free rate puzzle — emerges instead: why is the risk-free rate so low if agents are so averse to intertemporal substitution?
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Published in ICFAI Journal of Monetary Economics, 1989, vol. 24, pp.401-421
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Persistent link: https://EconPapers.repec.org/RePEc:spo:wpmain:info:hdl:2441/8686
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