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Implications for Asset Pricing Puzzles of a Roll-over Assumption for the Risk-Free Asset-super-

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  • GEOFFREY J. WARREN

Abstract

The equity risk premium and risk-free rate puzzles are largely resolved by combining persistent uncertainty over the long-term consumption growth rate with analysis of the risk-free asset on a 'roll-over' basis. Under these conditions, cash equivalents are evaluated as a multi-period investment strategy that hedges against adverse growth rate outcomes. The premium on the risky asset is raised and the risk-free rate lowered due to their respective relation with multi-period consumption risk. Historical average asset returns are matched at plausible risk aversion. Copyright (c) 2008 The Authors. Journal compilation (c) International Review of Finance Ltd. 2008.

Suggested Citation

  • Geoffrey J. Warren, 2008. "Implications for Asset Pricing Puzzles of a Roll-over Assumption for the Risk-Free Asset-super-," International Review of Finance, International Review of Finance Ltd., vol. 8(3-4), pages 125-157.
  • Handle: RePEc:bla:irvfin:v:8:y:2008:i:3-4:p:125-157
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