2024/01/17 by B. N. Kausik, Kausik, B. N.
Economics, Econometrics and Finance · #Economic theories and models #FOS: Economics and business #Financial Markets and Investment Strategies #General Economics (econ.GN) #Market Dynamics and Volatility
paper · pdf · doi:10.48550/arxiv.2401.09265
openalex publication_date 2024/01/17 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient markets the utility of money is polymorphic, with risk aversion dependent on the information available in each context, i.e. the discount on each future cash flow depends on all information available on that cash flow. Specifically, we prove that in efficient markets, informed investors maximize return on volatility by being risk-neutral with riskless bonds, and risk-averse with equities, thereby resolving the puzzle. We validate our results on historical data with surprising consistency. JEL Classification: C58, G00, G12, G17