This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of...

We investigate whether the set of Kreps and Porteus (1978) preferences include classes of preferences that are stationary, monotonic and well-ordered in terms of risk aversion. We prove that the class of preferences introduced by Hansen and Sargent (1995) in their robustness analysis is the only...

Estimates of agents' risk aversion differ between market studies and experimental studies. We demonstrate that the estimates can be reconciled through consistent treatment of agents' tendency for narrow framing, regarding integration of background wealth as well as across risky outcomes: Risk...

We use a DSGE model that generates endogenous movements in risk premia to examine the positive and normative implications of alternative monetary policy rules. As emphasized by the micro-finance literature, variation in risk arises because households face fixed costs of transferring cash across...

In contrast to Robert Mundell‘s Optimum Currency Area theory and his recommendation of forming monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries – most of all Germany, but also the Netherlands and Finland...

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full...