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What puzzles? : new insights in asset pricing

Aase, Knut K.
Working paper
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URI
http://hdl.handle.net/11250/164207
Date
2012-11
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  • Discussion papers (FOR) [591]
Abstract
Motivated by the problems of the conventional model in rationalizing

izing market data, we derive the equilibrium interest rate and risk premiums

using recursive utility in continuous time. In a representative-

agent framework our model allows for the separation of risk aversion

from the time preference. We demonstrate how this separation gives

new insights in asset pricing: The expressions for risk premiums com-

bine the market-based CAPM with the consumption-based CAPM.

The equilibrium real interest rate now combines characterizations of

preferences and market returns. This model explains both the Equity

Premium Puzzle and the Risk-Free Rate Puzzle with good margin,

and give solutions consistent with early resolution of uncertainty.
Publisher
Norwegian School of Economics. Department of Finance and Management Science
Series
Discussion paper;2012:13

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