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Intertemporal Asset Pricing - Evidence from Germany (Paperback, Softcover reprint of the original 1st ed. 1999)
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Intertemporal Asset Pricing - Evidence from Germany (Paperback, Softcover reprint of the original 1st ed. 1999)
Series: Contributions to Economics
Expected to ship within 10 - 15 working days
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In the mid-eighties Mehra and Prescott showed that the risk premium
earned by American stocks cannot reasonably be explained by
conventional capital market models. Using time additive utility,
the observed risk pre mium can only be explained by unrealistically
high risk aversion parameters. This phenomenon is well known as the
equity premium puzzle. Shortly aft erwards it was also observed
that the risk-free rate is too low relative to the observed risk
premium. This essay is the first one to analyze these puzzles in
the German capital market. It starts with a thorough discussion of
the available theoretical mod els and then goes on to perform
various empirical studies on the German capital market. After
discussing natural properties of the pricing kernel by which future
cash flows are translated into securities prices, various multi
period equilibrium models are investigated for their implied
pricing kernels. The starting point is a representative investor
who optimizes his invest ment and consumption policy over time. One
important implication of time additive utility is the identity of
relative risk aversion and the inverse in tertemporal elasticity of
substitution. Since this identity is at odds with reality, the
essay goes on to discuss recursive preferences which violate the
expected utility principle but allow to separate relative risk
aversion and intertemporal elasticity of substitution."
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