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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 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 [1985] 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."
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https://hal-sciencespo.archives-ouvertes.fr/hal-03399133
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Submitted on : Saturday, October 23, 2021 - 8:36:16 PM
Last modification on : Tuesday, January 25, 2022 - 3:18:03 PM

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  • HAL Id : hal-03399133, version 1
  • SCIENCESPO : 2441/8682

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Philippe Weil. The Equity Premium Puzzle and the Riskfree Rate Puzzle. 1989. ⟨hal-03399133⟩

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