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Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result

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Author Info
 Kocherlakota, Narayana R

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Abstract

For homothetic time and state separable preferences, the coefficient of relative risk aversion is equal to the reciprocal of the elasticity of intertemporal substitution. This paper shows that, when the growth rate of consumption is independent and identically distributed, asset pricing models based upon preferences in which the coefficient of relative risk aversion and the elasticity of intertemporal substitution are no longer linked do not have more explanatory power. Further, in these stochastic environments, estimates of the coefficient of relative risk aversion in the standard preferences are measures of the true coefficient of relative risk aversion and not the elasticity of intertemporal substitutions. These results are fairly accurate descriptions of economies calibrated using United States annual data. Copyright 1990 by American Finance Association.

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

Volume (Year): 45 (1990)
Issue (Month): 1 (March)
Pages: 175-90
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Handle: RePEc:bla:jfinan:v:45:y:1990:i:1:p:175-90

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  10. M. C. Freeman, I. R. Davidson, 1999. "Estimating the equity premium," European Journal of Finance, Taylor and Francis Journals, vol. 5(3), pages 236-246, September. [Downloadable!] (restricted)
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  12. Shmuel Kandel & Robert F. Stambaugh, 1991. "Asset Returns and Intertemporal Preferences," NBER Working Papers 3633, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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