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Implications of Quasi-Geometric Discounting on the Observable Sharpe Ratio

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  • Tack Yun
  • Wooheon Rhee
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Abstract

In this paper, we study implications of quasi-geometric discounting for stochastic properties of asset returns that can be observed in the financial market data. In particular, we emphasize that the dividend income from an asset measured in a unit of account may not reflect the whole dividend that consumers expect to obtain from the asset in models with quasi-geometric discounting. We then show that allowing for such a possibility in a stochastic growth model with quasi-geometric discounting requires a small departure towards time inconsistent preferences to match the Sharpe ratio observed in the U.S. data

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 243.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:243

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Keywords: Quasi-Geometric Discounting; Observable and Unobservable Asset Returns; the Sharpe Ratio;

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  1. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith Jr., 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," Temi di discussione (Economic working papers) 413, Bank of Italy, Economic Research and International Relations Area.
  2. John H. Cochrane, 1997. "Where is the market going? Uncertain facts and novel theories," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 3-37.
  3. Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
  4. Lettau, Martin & Uhlig, Harald, 1997. "Preferences, Consumption Smoothing, and Risk Premia," CEPR Discussion Papers 1678, C.E.P.R. Discussion Papers.
  5. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  6. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  7. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
  8. Robert J. Shiller, 1982. "Consumption, Asset Markets, and Macroeconomic Fluctuations," NBER Working Papers 0838, National Bureau of Economic Research, Inc.
  9. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
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