International Equity Premium Puzzle

Colacito and Croce (2010) "Risks For The Long Run And The Real Exchange Rate"

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i) risk aversion has to be large to reconcile the low volatility of consumption growth rates with highly volatile stochastic discount factors (see equity premium puzzle)

ii) consumption is poorly correlated across countries at annual or higher frequencies
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International Equity Premium Puzzle
Since Δe = m* - m ⇨ V(Δe) = V(m*) + V(m) - 2Cov(m*,m), if Cov(m*,m) is small as is observed in the data (consumption correlation), the volatility of exchange rate in the data is too small (V(m*) and V(m) are large).