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Asset returns and intertemporal preferences

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  • Kandel, Shmuel
  • Stambaugh, Robert F.

Abstract

A representative-agent model with time-varying moments of consumption growth is used to analyze implications about means and volatilities of asset returns as well as the predictability of asset returns for various investment horizons. A comparative-statics analysis using non-expected-utility preferences indicates that, although risk aversion is important in determining the means of both equity returns and interest rates, implications about the volatility and the predictability of equity returns are affected primarily by intertemporal substitution. Lower elasticities of intertemporal substitution are associated with greater variance in the temporary component of equity prices.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 27 (1991)
Issue (Month): 1 (February)
Pages: 39-71

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Handle: RePEc:eee:moneco:v:27:y:1991:i:1:p:39-71

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  2. Andrew Abel, . "Stock Prices Under Time-Varying Dividend Risk: An Exact Solution in an Infinite-Horizon General Equilibrium Model," Rodney L. White Center for Financial Research Working Papers 15-88, Wharton School Rodney L. White Center for Financial Research.
  3. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  4. Benninga, Simon & Protopapadakis, Aris, 1990. "Leverage, time preference and the 'equity premium puzzle'," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 49-58, January.
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  7. Selden, Larry, 1978. "A New Representation of Preferences over "Certain A Uncertain" Consumption Pairs: The "Ordinal Certainty Equivalent" Hypothesis," Econometrica, Econometric Society, vol. 46(5), pages 1045-60, September.
  8. Kocherlakota, Narayana R, 1990. " Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result," Journal of Finance, American Finance Association, vol. 45(1), pages 175-90, March.
  9. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
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  11. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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  23. Shmuel Kandel & Robert F. Stambaugh, . "Modeling Expected Stock Returns for Long and Short Horizons," Rodney L. White Center for Financial Research Working Papers 42-88, Wharton School Rodney L. White Center for Financial Research.
  24. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
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  26. repec:fth:harver:1533 is not listed on IDEAS
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