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The GEL Estimates Resolve the Risk-free Rate Puzzle in Japan

Author

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  • Mikio Ito

    (Faculty of Economics, Keio University)

  • Akihiko Noda

    (Keio Advanced Research Centers, Keio University)

Abstract

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.

Suggested Citation

  • Mikio Ito & Akihiko Noda, 2010. "The GEL Estimates Resolve the Risk-free Rate Puzzle in Japan," Keio/Kyoto Joint Global COE Discussion Paper Series 2010-007, Keio/Kyoto Joint Global COE Program.
    • Handle: RePEc:kei:dpaper:2010-007
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