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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson