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?
Description
The equity premium puzzle and the risk-free rate puzzle
%0 Journal Article
%1 Weil:JME:1989
%A Weil, Philippe
%D 1989
%J Journal of Monetary Economics
%K equity-premium ezw puzzle risk-free-rate
%N 3
%P 401-421
%R http://dx.doi.org/10.1016/0304-3932(89)90028-7
%T The Equity Premium Puzzle and the Risk-Free Rate Puzzle
%U http://www.sciencedirect.com/science/article/pii/0304393289900287
%V 24
%X 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?
@article{Weil:JME:1989,
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? },
added-at = {2014-10-12T19:27:40.000+0200},
author = {Weil, Philippe},
biburl = {https://www.bibsonomy.org/bibtex/289c229d9804dd6186356e46075359315/fcqms},
description = {The equity premium puzzle and the risk-free rate puzzle},
doi = {http://dx.doi.org/10.1016/0304-3932(89)90028-7},
interhash = {1ad73612405619400d7cda2f201e4a11},
intrahash = {89c229d9804dd6186356e46075359315},
issn = {0304-3932},
journal = {Journal of Monetary Economics },
keywords = {equity-premium ezw puzzle risk-free-rate},
number = 3,
pages = {401-421},
timestamp = {2014-10-21T05:21:10.000+0200},
title = {The Equity Premium Puzzle and the Risk-Free Rate Puzzle },
url = {http://www.sciencedirect.com/science/article/pii/0304393289900287},
volume = 24,
year = 1989
}