Working Paper: NBER ID: w2829
Authors: Philippe Weil
Abstract: 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."
Keywords: equity premium; risk-free rate; asset pricing; nonexpected utility; preferences
JEL Codes: G12; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| preference specifications (L15) | asset pricing outcomes (G19) |
| Kreps-Porteus preferences (D11) | equity premium puzzle (G12) |
| Kreps-Porteus preferences (D11) | risk-free rate puzzle (G19) |
| separating risk aversion from intertemporal substitution (D11) | equity premium puzzle (G12) |