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Hyperbolic or exponential time discounting function? Empirical est using a conditional Consumption Capital Asset Pricing Model

Author

Listed:
  • Hubert de La Bruslerie

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Alain Coën

    (University of Quebec at Montreal, Montreal, Quebec, Canada - UQAM - Université du Québec à Montréal = University of Québec in Montréal)

Abstract

The main objective in this article is to shed new light on the term structure of subjective time preference rates using a conditional Consumption Capital Asset Pricing Model. Following Samuelson's (1937)'s suggestion, we analyze the concept of "time consistency". More precisely, we challenge the relevance of the exponential time discounting function assumption, which leads to a constant subjective time preference rate. First, we develop a parsimonious, consumption-based model of the term structure of interest rates. Second, we test its implications for US monthly data from 1970:4 to 2013:1. We use a bivariate two-factor model of inflation and real consumption (through a VAR-GARCH process) to condition the term premiums of bonds. Our results clearly cast doubt on the assumption of a flat term structure, as implied by the standard exponential discounting function. A decreasing term structure of time preference rates is reported. It is particularly clear for the 1991-2013 period. Our results give strong support for the hyperbolic time discounting function hypothesis and open the way for the hypothesis of time varying time preference rates.

Suggested Citation

  • Hubert de La Bruslerie & Alain Coën, 2020. "Hyperbolic or exponential time discounting function? Empirical est using a conditional Consumption Capital Asset Pricing Model," Post-Print hal-02955637, HAL.
    • Handle: RePEc:hal:journl:hal-02955637
    as

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