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The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

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  • Ahn, Chang Mo
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    Abstract

    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. Copyright 1989 by American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal Journal of Finance.

    Volume (Year): 44 (1989)
    Issue (Month): 5 (December)
    Pages: 1411-20

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    Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1411-20

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    Cited by:
    1. Antoine Bommier, 2005. "Life-Cycle Theory for Human Beings," Working Papers hal-00441890, HAL.
    2. Antoine Bommier, 2008. "Rational Impatience ?," Working Papers hal-00441880, HAL.
    3. Antoine Bommier, 2006. "Mortality, Time Preference and Life-Cycle Models," Working Papers hal-00441888, HAL.

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