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World Equity Premium based Risk Aversion Estimates

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  • L.C.G. Pozzi

    (Erasmus University Rotterdam)

  • C.G. de Vries

    (Erasmus University Rotterdam)

  • J. Zenhorst

    (Erasmus University Rotterdam)

Abstract

The equity premium puzzle holds that the coefficient of relative risk aversion estimated from the consumption based CAPM under power utility is excessively high. Moreover, estimates in the literature vary considerably across countries. We gauge the uncertainty pertaining to the country risk aversion estimates by means of jackknife resampling and pooling. The confidence band for the world risk aversion estimate from the pooled country data is much tighter and the pooled point estimate presents less of a puzzle than the individual country estimates.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-007/2.

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Date of creation: 05 Jan 2010
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Handle: RePEc:dgr:uvatin:20100007

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Web page: http://www.tinbergen.nl

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Keywords: Equity premium puzzle; Jackknife; Pooling;

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  2. Orazio P. Attanasio & James Banks & Sarah Tanner, 2002. "Asset Holding and Consumption Volatility," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 771-792, August.
  3. Mankiw, N. Gregory & Zeldes, Stephen P., 1991. "The consumption of stockholders and nonstockholders," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(1), pages 97-112, March.
  4. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," NBER Working Papers 8896, National Bureau of Economic Research, Inc.
  5. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  6. Annette Vissing-Jorgensen, 2002. "Limited Asset Market Participation and the Elasticity of Intertemporal Substitution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(4), pages 825-853, August.
  7. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
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