The Importance of Timing Attitudes in Consumption-Based Asset Pricing Models

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  • Martin Møller Andreasen
  • Kasper Jørgensen, Board of Governors of the Federal Reserve System, Division of Monetary Affairs

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.

TidsskriftJournal of Monetary Economics
Sider (fra-til)95-117
StatusUdgivet - maj 2020

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