NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Equity Premium Puzzle and the Riskfree Rate Puzzle

Philippe Weil

NBER Working Paper No. 2829
Issued in 1989
NBER Program(s):   ME

This paper studies the implications for general equilibrium asset pricing of a recently introduced class of Kreps-Porteus non-expected utility preferences, which is characterized by a constant intertemporal elasticity of substitution and a constant, but unrelated, coefficient of relative risk aversion. It is shown that the solution to the "equity premium puzzle" documented by Mehra and Prescott [19851 cannot be found, for plausibly calibrated parameter values, by simply separating risk aversion from intertemporal substitution. Rather, relaxing the parametric restriction on tastes implicit in the time-addictive expected utility specification and adopting Kreps-Porteus preferences in the direction of "more realism" is likely to add a "riskfree rate puzzle" to Mehra's and Prescott's "equity premium puzzle."

download in pdf format
   (276 K)

email paper

This paper is available as PDF (276 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Published as "The Equity Premium Puzzle and the Risk-Free Rate Puzzle", Journal of Monetary Economics, Vol. 24, no. 3 (1989): 401-422.

Users who downloaded this paper also downloaded these:
Mehra w9512 The Equity Premium: Why is it a Puzzle?
Benartzi and Thaler w4369 Myopic Loss Aversion and the Equity Premium Puzzle
Mehra and Prescott w9525 The Equity Premium in Retrospect
Giovannini and Weil w2824 Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model
Cecchetti, Lam, and Clark w3752 The Equity Premium and the Risk Free Rate: Matching the Moments
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us