Agents' Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data

36 Pages Posted: 1 Feb 2006

See all articles by Anne Epaulard

Anne Epaulard

Université Paris IX Dauphine

Aude Pommeret

University of Lausanne

Date Written: August 2001

Abstract

This paper aims to measure the risk premium on French equities during 1960-92 and to evaluate how well theoretical models based on various representations of agents' preferences can explain it. Aside from the standard, time-additive utility function with constant relative risk aversion three other utility functions are reviewed: a recursive utility function a habit formation utility function and a utility function that accounts for the interdependence of preferences. Both calibration and econometric estimations show that none of the studied marginal changes in the representation of agents' preferences are sufficient to solve both the equity premium puzzle and the risk-free rate puzzle.

Keywords: Equity premium puzzle, risk-free rate puzzle

JEL Classification: E11, G11

Suggested Citation

Epaulard, Anne and Pommeret, Aude, Agents' Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data (August 2001). IMF Working Paper No. 01/117, Available at SSRN: https://ssrn.com/abstract=879862

Anne Epaulard (Contact Author)

Université Paris IX Dauphine ( email )

223 Rue Saint-Honore
Paris, 75775
France

Aude Pommeret

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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