An interrelation of time preference and risk attitude: an application to the equity premium puzzle

摘要

In the fields of behavioural economics and finance, several researchers show that the time preference of an investor is related to his/her attitude towards risky assets. This article investigates whether the equity premium puzzle laid out in Mehra and Prescott (198510. Mehra, R. and Prescott, E. 1985. The equity premium: a puzzle. Journal of Monetary Economics , 15: 145-61. [CrossRef], [Web of Science ®]View all references) can be accounted for when this relation is imposed on the representative agent model of asset pricing. Three primary features of our analysis allow us to investigate the relationship. First, we derive an equation satisfied by the rate of time preference. Second, our model can yield an equity premium that is consistent with the observed data even in the standard power utility setting. Third, to fit the observed equity premium, we show that it is required to assume a negative rate of time preference, which is consistent with Kocherlakota (19968. Kocherlakota, N. 1996. The equity premium: it's still a puzzle. Journal of Economic Literature , 23: 42-71. View all references) and Brennan and Xia (20014. Brennan, M. and Xia, Y. 2001. Stock price volatility and equity premium. Journal of Monetary Economics , 47: 249-83. [CrossRef], [Web of Science ®]View all references).View full textDownload full textKeywordsequity premium puzzle, time preference, risk attitudeJEL ClassificationG12Related var addthis_config = { ui_cobrand: "Taylor & Francis Online", services_compact: "citeulike,netvibes,twitter,technorati,delicious,linkedin,facebook,stumbleupon,digg,google,more", pubid: "ra-4dff56cd6bb1830b" }; Add to shortlist Link Permalink http://dx.doi.org/10.1080/13504851.2011.587755