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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework

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Author Info
Epstein, Larry G
Zin, Stanley E

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Abstract

This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries. An important feature of these general preferences is that they permit risk attitudes to be disentangled from the degree of intertemporal substitutability. Moreover, in an infinite horizon, representative-agent context, these preference specifications lead to a model of asset returns in which appropriate versions of both the atemporal CAPM and the intertemporal consumption CAPM are nested as special cases. In the authors' general model, systematic risk of an asset is determined by covariance with both the return to the market portfolio and consumption growth. Copyright 1989 by The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 57 (1989)
Issue (Month): 4 (July)
Pages: 937-69
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Handle: RePEc:ecm:emetrp:v:57:y:1989:i:4:p:937-69

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