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The equity premium puzzle and decreasing relative risk aversion

  • Maurice J. Roche

Agents are assumed to have a power risk aversion utility function in an otherwise standard asset-pricing model. When these preferences display decreasing relative risk aversion they are capable of eliminating one version of the equity premium and risk free rate puzzles.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

Volume (Year): 2 (2006)
Issue (Month): 3 (May)
Pages: 179-182

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Handle: RePEc:taf:apfelt:v:2:y:2006:i:3:p:179-182
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  1. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  2. Joseph Eisenhauer & Luigi Ventura, 2003. "Survey measures of risk aversion and prudence," Applied Economics, Taylor & Francis Journals, vol. 35(13), pages 1477-1484.
  3. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November.
  4. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc.
  5. Stuart Hyde & Mohamed Sherif, 2005. "Don't break the habit: structural stability tests of consumption asset pricing models in the UK," Applied Economics Letters, Taylor & Francis Journals, vol. 12(5), pages 289-296.
  6. Atsushi Maki & Tadashi Sonoda, 2002. "A solution to the equity premium and riskfree rate puzzles: an empirical investigation using Japanese data," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 601-612.
  7. Mette Wik & Tewodros Aragie Kebede & Olvar Bergland & Stein Holden, 2004. "On the measurement of risk aversion from experimental data," Applied Economics, Taylor & Francis Journals, vol. 36(21), pages 2443-2451.
  8. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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