Department of Economics and Business Economics

Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution

Research output: Working paper/Preprint Working paperResearch

Standard

Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. / Andreasen, Martin Møller; Jørgensen, Kasper.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2016.

Research output: Working paper/Preprint Working paperResearch

Harvard

Andreasen, MM & Jørgensen, K 2016 'Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Andreasen, M. M., & Jørgensen, K. (2016). Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers No. 2016-16

CBE

Andreasen MM, Jørgensen K. 2016. Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Andreasen, Martin Møller and Kasper Jørgensen Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2016-16). 2016., 40 p.

Vancouver

Andreasen MM, Jørgensen K. Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. Aarhus: Institut for Økonomi, Aarhus Universitet. 2016 May 10.

Author

Andreasen, Martin Møller ; Jørgensen, Kasper. / Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution. Aarhus : Institut for Økonomi, Aarhus Universitet, 2016. (CREATES Research Papers; No. 2016-16).

Bibtex

@techreport{edadce2cfa724081a4427d4c37d06aeb,
title = "Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution",
abstract = "This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate puzzle with a low IES of 0:07 and a low RRA of 5.",
keywords = "Bond premium puzzle, Equity premium puzzle, Long-run risk, Perturbation Approximation, Risk-free rate puzzle",
author = "Andreasen, {Martin M{\o}ller} and Kasper J{\o}rgensen",
year = "2016",
month = may,
day = "10",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2016-16",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution

AU - Andreasen, Martin Møller

AU - Jørgensen, Kasper

PY - 2016/5/10

Y1 - 2016/5/10

N2 - This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate puzzle with a low IES of 0:07 and a low RRA of 5.

AB - This paper extends the class of Epstein-Zin-Weil preferences with a new utility kernel that disentangles uncertainty about the consumption trend (long-run risk) from short-term variation around this trend (cyclical risk). Our estimation results show that these preferences enable the long-run risk model to explain asset prices with a low relative risk aversion (RRA) of 9.8 and a low intertemporal elasticity of substitution (IES) of 0:11. We also show that the proposed preferences allow an otherwise standard New Keynesian model to match the equity premium, the bond premium, and the risk-free rate puzzle with a low IES of 0:07 and a low RRA of 5.

KW - Bond premium puzzle, Equity premium puzzle, Long-run risk, Perturbation Approximation, Risk-free rate puzzle

M3 - Working paper

T3 - CREATES Research Papers

BT - Explaining Asset Prices with Low Risk Aversion and Low Intertemporal Substitution

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -