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The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate
Author(s) -
AHN CHANG MO
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb02662.x
Subject(s) - economics , equity premium puzzle , risk aversion (psychology) , interest rate , econometrics , consumption (sociology) , risk premium , consumption smoothing , microeconomics , monetary economics , expected utility hypothesis , financial economics , macroeconomics , business cycle , social science , sociology
This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.