New to finance. When I read textbook like Financial Economics by Bodie, I encountered the following idea, namely, higher risk aversion is associated with higher risk premium and lower risk-free rate.
I understand the risk premium part. But I cannot convince myself about the risk-free rate. Higher risk premium does not necessarily imply lower risk-free rate. I thought higher risk aversion should be associated with higher risk-free rate. My reasoning is that as more and more people get highly risk averse, more and more people will prefer risk-free assets to risky assets, the demand for risk-free assets increases. Simple supply and demand story tells us that higher demand of risk-free assets leads to higher prices or higher risk-free rates in this case (of course, if we hold supply constant). I do not know where my reasoning goes wrong.