First-order ’ risk aversion and the equity premium puzzle *

@inproceedings{Epstein1990FirstorderR,
title={First-order ’ risk aversion and the equity premium puzzle *},
author={Larry G. Epstein and Stanley E. Zin},
year={1990}
}

This paper Integrates Yaari’s dual theory of choice under uncertamty into a multiperiod context and examines its imphcations for the equity premium puzzle. An Important property of these preferences IS that of ‘tirst-order risk aversion’ which implies. in our model. that the risk premium for a small gamble is proportronal to the standard deviation rather than the variance. Since the standard devration of the growth rate m aggregate consumptron is considerably larger than Its varrance, the model… CONTINUE READING