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The Risk-Free Rate In A Finite Horizon Model With Bequests

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  • Xiaoyong Cui
  • Liutang Gong

Abstract

type="main"> This paper studies the risk-free rate in an overlapping generations economy with bequests. It is shown that the risk-free rate depends on risk aversion, the elasticity of intertemporal substitution, the share of wealth invested in human wealth, life expectancy, and the preference for bequests. In a standard life-cycle context, mortality increases the subjective time rate of discount, and thus increases the compensation required to postpone consumption. This latter effect is offset in a bequest-driven model of the type considered here, leading to much more powerful income effects. In this sense, the model provides a bequest-motive explanation for the risk-free rate puzzle put forward by Weil in 1989.

Suggested Citation

  • Xiaoyong Cui & Liutang Gong, 2015. "The Risk-Free Rate In A Finite Horizon Model With Bequests," Bulletin of Economic Research, Wiley Blackwell, vol. 67(2), pages 105-114, April.
  • Handle: RePEc:bla:buecrs:v:67:y:2015:i:2:p:105-114
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    File URL: http://hdl.handle.net/10.1111/j.1467-8586.2012.00456.x
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