Risk-Free Rate Puzzle - RFRP

外汇网2021-06-19 16:01:47 53

An anomaly in the difference between the lower historic real returns of government bonds compared to equities. This puzzle is the inverse of the equity pmium puzzle, and looks at the disparity from the perspective from the lower returning government bonds.

|||The risk-free rate puzzle is used to explain why bond returns are lower than equity returns by looking at investor pference. If investors tend to seek out high returns, why do they invest heavily in government bonds rather than in equities? If investors did invest in more equities, returns from equities would fall, causing the returns for government bonds to rise and making the equity pmium smaller.

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