This paper provides a potential solution to asset return puzzles as has been noted in macro-finance literature since the seminal work of Mehra and Prescott (1985). It is well known that the standard consumption-based asset pricing model gives rise to asset return puzzles that high equity premium (5-6%) and low risk-free rate (1-2%) can’t be explained with a reasonable degree of risk aversion in the CRRA utility function, which is commonly employed in macroeconomic literature. Hence, these puzzles raise critical questions for the common macroeconomic modeling exercise. The present paper addresses these puzzles by introducing structural uncertainty in the data generating process of the dividend growth so that the sizeable equity premium and low risk free rate can be generated with the risk aversion below 10. The consumer-investor with the structural uncertainty may perceive that extreme outcomes occur more frequently than represented by Gaussian distribution so that the investor may ask for high premium for holding equity while accepting low returns for risk-free bonds. In addition, the structural uncertainty proposed in this paper is tractable as well as intuitive.
JEL codes: G12, E21
Keywords: equity premium puzzle, risk-free rate puzzle, consumption-based asset pricing, structural uncertainty, NIG distribution
학회소식
[2012년 제 4차] The Role of Structural Uncertainty in Asset Returns
작성자 : 관리자
조회수 : 1091
게시일 :
2012-12-12
