22 Pages Posted: 28 Aug 2000
Date Written: 1989
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: 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