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Journal Articles ICFAI Journal of Monetary Economics Year : 1989

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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Dates and versions

hal-03393298 , version 1 (21-10-2021)

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Cite

Philippe Weil. The Equity Premium Puzzle and the Riskfree Rate Puzzle. ICFAI Journal of Monetary Economics, 1989, 24 (3), pp.401 - 421. ⟨10.1016/0304-3932(89)90028-7⟩. ⟨hal-03393298⟩
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