On the Range of the Risk-Free Interest Rate in Incomplete Markets

22 Pages Posted: 6 Feb 2004

See all articles by Chiaki Hara

Chiaki Hara

Kyoto University - Institute of Economic Research

Atsushi Kajii

Institute of Economic Research, Kyoto University; Singapore Management University

Date Written: November 2003

Abstract

In a model of a two-period exchange economy under uncertainty, we find both upper and lower bounds for the risk free interest rate when the agents' utility functions exhibit constant absolute risk aversion. These bounds are independent of the degree of market incompleteness, and so in particular these results show to what extent market incompleteness can explain the risk-free rate puzzle in this class of general equilibrium models with heterogeneous agents. A general method of finding these bounds without the assumption of constant absolute risk aversion is also presented.

Keywords: The risk-free rate puzzle, constant absolute risk aversion, incomplete markets, general equilibrium

JEL Classification: D52, D91, E21, E44, G12

Suggested Citation

Hara, Chiaki and Kajii, Atsushi, On the Range of the Risk-Free Interest Rate in Incomplete Markets (November 2003). Available at SSRN: https://ssrn.com/abstract=494582 or http://dx.doi.org/10.2139/ssrn.494582

Chiaki Hara

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

Atsushi Kajii (Contact Author)

Institute of Economic Research, Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

HOME PAGE: http://www.kier.kyoto-u.ac.jp/~kajii/

Singapore Management University ( email )

School of Economics
90 Stamford Road
Singapore, 178903
Singapore

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
155
Abstract Views
1,683
rank
207,835
PlumX Metrics