EconPapers    
Economics at your fingertips  
 

State Dependent Preferences Can Explain the Equity Premium Puzzle

Angelo Melino () and Alan Yang

Working Papers from University of Toronto, Department of Economics

Abstract: We introduce state dependent recursive preferences into the Mehra-Prescott economy. We show that such preferences can match the historical first two moments of the returns on equity and the risk free rate. Other authors have reported similar results using state dependent expected utility preferences. These authors have tended to emphasize the importance of countercyclical risk aversion in explaining the equity premium puzzle. We find that countercyclical risk aversion plays an important role but only when combined with modest cyclical variation in intertemporal substitution.

Pages: 34 pages
Date: 2003-07-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45) Track citations by RSS feed

Downloads: (external link)
https://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-MELINO-03-01.pdf MainText (application/pdf)

Related works:
Journal Article: State Dependent Preferences Can Explain the Equity Premium Puzzle (2003) Downloads
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:tor:tecipa:melino-03-01

Access Statistics for this paper

More papers in Working Papers from University of Toronto, Department of Economics 150 St. George Street, Toronto, Ontario.
Bibliographic data for series maintained by RePEc Maintainer ().

 
Page updated 2022-07-26
Handle: RePEc:tor:tecipa:melino-03-01