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The Equity Premium Puzzle and the Riskfree Rate Puzzle

Abstract : 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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Submitted on : Thursday, October 21, 2021 - 10:07:43 PM
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  • HAL Id : hal-03393298, version 1
  • SCIENCESPO : 2441/8686



Philippe Weil. The Equity Premium Puzzle and the Riskfree Rate Puzzle. ICFAI Journal of Monetary Economics, 1989, 24 (3), pp.401 - 421. ⟨hal-03393298⟩



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