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The subjective discount factor and the coefficient of relative risk aversion under time-additive isoelastic expected utility model

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  • Dominique Pepin

    (CRIEF)

Abstract

By analysing the restrictions that ensure the existence of capital market equilibrium, we show that the coefficient of relative risk aversion and the subjective discount factor cannot be high simultaneously as they are supposed to be to make the standard asset pricing consistent with financial stylised facts.

Suggested Citation

  • Dominique Pepin, 2016. "The subjective discount factor and the coefficient of relative risk aversion under time-additive isoelastic expected utility model," Papers 1604.03337, arXiv.org, revised Jun 2016.
    • Handle: RePEc:arx:papers:1604.03337
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    References listed on IDEAS

    as
    1. Mehra, Rajnish, 1988. "On the Existence and Representation of Equilibrium in an Economy with Growth and Nonstationary Consumption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 131-135, February.
    2. Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
    3. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
    4. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    5. Nestor Gandelman & Ruben Hernandez-Murillo, 2015. "Risk Aversion at the Country Level," Review, Federal Reserve Bank of St. Louis, vol. 97(1), pages 53-66.
    6. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    7. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    8. Azeredo, Francisco, 2007. "The Equity Premium: A Deeper Puzzle," University of California at Santa Barbara, Economics Working Paper Series qt6ks5p6v5, Department of Economics, UC Santa Barbara.
    9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    10. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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