Department of Economics and Business Economics

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

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • 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.

Original languageEnglish
JournalJournal of Monetary Economics
Volume111
Pages (from-to)95-117
ISSN0304-3932
DOIs
Publication statusPublished - May 2020

    Research areas

  • Bond premium puzzle, Early resolution of uncertainty, Equity premium puzzle, Long-run risk

See relations at Aarhus University Citationformats

ID: 144094950