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

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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.

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  • Geoffrey J. Warren, 2008. "Implications for Asset Pricing Puzzles of a Roll‐over Assumption for the Risk‐Free Asset," International Review of Finance, International Review of Finance Ltd., vol. 8(3‐4), pages 125-157, September.
    • Handle: RePEc:bla:irvfin:v:8:y:2008:i:3-4:p:125-157
    DOI: 10.1111/j.1468-2443.2008.00079.x
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