Implications for Asset Pricing Puzzles of a Roll-Over Assumption for the Risk-Free Asset

33 Pages Posted: 2 Dec 2008

Abstract

The equity risk premium and risk-free rate puzzles are largely resolved by combining persistent uncertainty over the long-term consumption growth rate with analysis of the risk-free asset on a 'roll-over' basis. Under these conditions, cash equivalents are evaluated as a multi-period investment strategy that hedges against adverse growth rate outcomes. The premium on the risky asset is raised and the risk-free rate lowered due to their respective relation with multi-period consumption risk. Historical average asset returns are matched at plausible risk aversion.

Suggested Citation

Warren, Geoffrey J., Implications for Asset Pricing Puzzles of a Roll-Over Assumption for the Risk-Free Asset. International Review of Finance, Vol. 8, Issue 3-4, pp. 125-157, September/December 2008, Available at SSRN: https://ssrn.com/abstract=1308281 or http://dx.doi.org/10.1111/j.1468-2443.2008.00079.x

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