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Asset pricing puzzles in an OLG economy with generalized preference
Author(s) -
DaSilva Amadeu,
Farka Mira
Publication year - 2018
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12133
Subject(s) - equity premium puzzle , economics , capital asset pricing model , overlapping generations model , elasticity of intertemporal substitution , portfolio , consumption based capital asset pricing model , preference , microeconomics , elasticity of substitution , equity (law) , econometrics , asset (computer security) , asset allocation , constraint (computer aided design) , time preference , financial economics , production (economics) , computer science , mathematics , growth model , geometry , computer security , political science , law
We seek to explain a number of asset pricing anomalies – the equity premium puzzle, the risk‐free rate puzzle, and portfolio allocation puzzle – in a parsimonious overlapping generations (OLG) model with two key features: borrowing constraint and Epstein–Zin–Weil (1989) preference. The model goes a long way towards the resolution of these puzzles, and is able to simultaneously match asset pricing moments and individual portfolio decisions using reasonable values of parameters governing behavior. We find that the main driver of savings behavior, equity returns, and asset allocation is the relative difference between the two parameters: the level of relative risk aversion and the inverse of the elasticity of substitution.