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The Equity Premium Puzzle and the Riskfree Rate Puzzle

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  • Philippe Weil

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

This paper studies the implications for general equilibrium asset pricing of a class of Kreps-Porteus nonexpected utility preferences characterized by a constant intertemporal elasticity of substitution and a constant, but unrelated, coefficient of relative risk aversion. It is shown that relaxing the parametric restriction on tastes imposed by the time-additive expected utility specification does not suffice to solve the Mehra-Prescott (1985) equity premium puzzle. An additional puzzle — the risk-free rate puzzle — emerges instead: why is the risk-free rate so low if agents are so averse to intertemporal substitution?

Suggested Citation

  • Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," Post-Print hal-03393298, HAL.
    • Handle: RePEc:hal:journl:hal-03393298
    DOI: 10.1016/0304-3932(89)90028-7
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03393298
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