NATIONAL ASSEMBLY LAW ON SECURITIES
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Because both nondurable and durable consumption are smooth, the durable consumption model requires high risk aversion to fit the high level and volatil- ity of expected stock returns. This paper shows that the model can successfully explain the cross-sectional and time variation in expected stock returns, con- ditional on an “equity premium puzzle” (Mehra and Prescott (1985)). The high risk aversion does not imply a “risk-free rate puzzle” (Weil (1989)) in the model because recursive utility allows the EIS to be higher than the inverse of risk aversion....
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