Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data
IMF Working Papers, August 1, 2001
Source details
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- Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data
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Bibliographic details
- Authors: Aude Pommeret, Anne Epaulard
- Published: August 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451854015.001
Authors and publication
- By Aude Pommeret, Anne Epaulard
- August 1, 2001
- IMF Working Papers, Working Paper No. 2001/117, Issue: 117, Volume: 2001
- Pages: 36
- DOI: https://doi.org/10.5089/9781451854015.001
- Stock No: WPIEA1172001
- ISBN: 9781451854015
- ISSN: 1018-5941
Research objective and data
- Aim: Measure the risk premium on French equities during 1960-92 and evaluate how well theoretical models based on various representations of agents' preferences can explain it.
- Time span analyzed: 1960-92
Models and utility specifications evaluated
- Standard, time-additive utility function with constant relative risk aversion
- Recursive utility function
- Habit formation utility function
- Utility function that accounts for the interdependence of preferences
Methods
- Calibration
- Econometric estimations
- Focus on agents' preferences as they relate to the equity premium and the consumption-saving trade-off (including Euler equation/consumption-saving trade-off equation considerations)
Key findings
- Both calibration and econometric estimations show:
- None of the studied marginal changes in the representation of agents' preferences are sufficient to solve both the equity premium puzzle and the risk-free rate puzzle.
- Primary puzzles addressed:
- Equity premium puzzle
- Risk-free rate puzzle
Subject areas and keywords
- Subject: Consumption, Econometric analysis, Estimation techniques, Financial institutions, National accounts, Stocks, Tax allowances, Taxes, Treasury bills and bonds
- Keywords: Consumption, consumption-risk aversion, consumption-saving trade-off equation, econometric estimation, equity premium, Equity premium puzzle, Estimation techniques, Euler equation, growth rate, rate of return, risk-free rate puzzle, Stocks, Tax allowances, Treasury bills and bonds, utility function, WP
Source: IMF Working Paper "Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data" by Aude Pommeret and Anne Epaulard (August 1, 2001).