Abstract
Agents are assumed to have a power risk aversion utility function in an otherwise standard asset-pricing model. When these preferences display decreasing relative risk aversion they are capable of eliminating one version of the equity premium and risk free rate puzzles.
Acknowledgements
We thank the Irish Higher Education Authority for providing research support under the North South Programme for Collaborative Research.
Notes
1 The instruments chosen were a constant, consumption lagged one period, the equity premium lagged one period, and the real return on treasury bills lagged one period.
2 The instruments were the same as in Footnote 1.