Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data

August 1, 2001

Preview Citation

Format: Chicago

Aude Pommeret, and Anne Epaulard. Agents’ Preferences, the Equity Premium, and the Consumption-Saving Trade-Off: An Application to French Data, (USA: International Monetary Fund, 2001) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper aims to measure the risk premium on French equities during 1960-92 and to evaluate how well theoretical models based on various representations of agents' preferences can explain it. Aside from the standard, time-additive utility function with constant relative risk aversion, three other utility functions are reviewed: a recursive utility function, a habit formation utility function, and a utility function that accounts for the interdependence of preferences. Both calibration and econometric estimations show that 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.

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

Publication Details

Pages:

36
Volume:

---
DOI:

---
Issue:

---
Series:

Working Paper No. 2001/117
Stock No:

WPIEA1172001
ISBN:

9781451854015
ISSN:

1018-5941

FACTSHEETS

RESOURCES

TOPICS

Flagship Publications

Other Publications

IMF reports and publications by country

Regional Offices

All News

See Also

For Journalists

Press Center

RESOURCES

FLAGSHIPS

KEY SERIES

IMF NOTES

IMF Working Papers