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Robustness, the Spirit of Capitalism and Asset Pricing

Author

Listed:
  • Gaowang Wang

    (Shandong University)

  • Juanjuan Yan

    (Central University of Finance and Economics)

Abstract

This paper examines how a preference for robustness affects optimal consumption-portfolio rules as well as the equilibrium asset returns when investors care about their social status (or they have the spirit of capitalism). It is shown that the interaction of these two preferences leads to higher equity premium by enhancing the investor's effective risk aversion and making them more conservative in risk-taking. In addition, we find that they also lead to greater precautionary savings and lower risk-free rate in general equilibrium. We then show that the interaction of the two preferences has the potential to resolve the equity premium puzzle and the risk-free rate puzzle for plausible parameter values.

Suggested Citation

  • Gaowang Wang & Juanjuan Yan, 2016. "Robustness, the Spirit of Capitalism and Asset Pricing," Economics Bulletin, AccessEcon, vol. 36(4), pages 1892-1903.
    • Handle: RePEc:ebl:ecbull:eb-16-00565
    as

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    References listed on IDEAS

    as
    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    3. Zou, Heng-fu, 1994. "'The spirit of capitalism' and long-run growth," European Journal of Political Economy, Elsevier, vol. 10(2), pages 279-293, July.
    4. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
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    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    7. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, vol. 29(1), pages 97-112, March.
    8. Smith, William T, 2001. "How Does the Spirit of Capitalism Affect Stock Market Prices?," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1215-1232.
    9. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    More about this item

    Keywords

    the Spirit of Capitalism; Robustness; the Equity Premium Puzzle; the Risk-free Rate Puzzle;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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