Abstract
Dynamic equilibrium models of the macroeconomy are often unable to replicate the asset returns observed in financial markets. Both Lucas [1978] endowment economies and equilibrium business cycle models typically predict either lower risk premiums or higher risk-free rates than those found empirically. The low risk premium was designated the “equity premium puzzle” by Mehra and Prescott [1985], and this puzzle has stimulated extensive research into alternative specifications for dynamic equilibrium models2. This paper shows that a model with nonexpected utility preferences can replicate the asset returns observed in financial markets.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
