The GEL Estimates Resolve the Risk-free Rate Puzzle in Japan
We show the nonexistence of the well-known risk-free rate puzzle in the Japanese financial markets. This result crucially depends on the accurate estimates of the two basic parameters: the subjective discount factor and the degree of risk aversion, appearing in the standard consumption-based capital asset pricing model (CCAPM). We estimate these parameters by the recently developed method, generalized empirical likelihood (GEL) estimation; we also confirm our results by comparing mean squared errors (MSEs) based on higher order biases and first order asymptotic variances of the estimates.
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Web page: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/
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