TY - JOUR
T1 - The Importance of Timing Attitudes in Consumption-Based Asset Pricing Models
AU - Andreasen, Martin Møller
AU - Jørgensen, Kasper
PY - 2020/5
Y1 - 2020/5
N2 - A new utility kernel for Epstein-Zin-Weil preferences is proposed to disentangle the intertemporal elasticity of substitution (IES), the relative risk aversion (RRA), and the timing attitude. These new preferences resolve two puzzles in the long-run risk model, where consumption growth is too strongly correlated with the price-dividend ratio and the risk-free rate. The proposed preferences also enable a New Keynesian model to match equity and bond premia with a low RRA of 5. Importantly, the mechanism enabling Epstein-Zin-Weil preferences to explain asset prices in these models is not to separate the IES from RRA, but to introduce a strong timing attitude.
AB - A new utility kernel for Epstein-Zin-Weil preferences is proposed to disentangle the intertemporal elasticity of substitution (IES), the relative risk aversion (RRA), and the timing attitude. These new preferences resolve two puzzles in the long-run risk model, where consumption growth is too strongly correlated with the price-dividend ratio and the risk-free rate. The proposed preferences also enable a New Keynesian model to match equity and bond premia with a low RRA of 5. Importantly, the mechanism enabling Epstein-Zin-Weil preferences to explain asset prices in these models is not to separate the IES from RRA, but to introduce a strong timing attitude.
KW - Bond premium puzzle
KW - Early resolution of uncertainty
KW - Equity premium puzzle
KW - Long-run risk
UR - http://www.scopus.com/inward/record.url?scp=85060498505&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2019.01.008
DO - 10.1016/j.jmoneco.2019.01.008
M3 - Journal article
AN - SCOPUS:85060498505
SN - 0304-3932
VL - 111
SP - 95
EP - 117
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -