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The Equity Premium Puzzle and the Riskfree Rate Puzzle

22 Pages Posted: 28 Aug 2000 Last revised: 28 Sep 2010

Philippe Weil

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: 1989

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."

Suggested Citation

Weil, Philippe, The Equity Premium Puzzle and the Riskfree Rate Puzzle (1989). NBER Working Paper No. w2829. Available at SSRN: https://ssrn.com/abstract=227230

Philippe Weil (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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