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

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Author Info

  • Larry G. Epstein
  • Stanley E. Zin

Abstract

This paper investigates infinite horizon intertemporal utility functions which generalize the standard additive expected utility specification. Two classes of generalization are considered -- the first builds upon Kreps and Porteus (1978, 1979), while the second is a further generalization which embeds the non-expected utility theory of Dekel (1986) into a multiperiod framework. Each type of generalization permits intertemporal substitution and risk aversion to be disentangled. In the context of the representative agent model, each specification implies testable restrictions on the temporal behaviour of consumption and asset returns.

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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 699.

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Length: 54 pages
Date of creation: 1987
Date of revision:
Handle: RePEc:qed:wpaper:699

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Cited by:
  1. Frode Brevik & Stefano d'Addona, 2005. "Information Quality and Stock Returns Revisited," Finance 0511006, EconWPA, revised 28 Nov 2005.
  2. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2012. "A Quantitative Theory of Information and Unsecured Credit," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 153-83, July.
  3. Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
  4. Robert E. Hall, 1988. "Substitution over Time in Work and Consumption," NBER Working Papers 2789, National Bureau of Economic Research, Inc.
  5. Ryan D. Edwards, 2008. "The Cost of Uncertain Life Span," NBER Working Papers 14093, National Bureau of Economic Research, Inc.
  6. Stefano G. Athanasoulis & Robert J. Shiller, 1999. "World Income Components: Measuring and Exploiting Risk-Sharing Opportunities," Cowles Foundation Discussion Papers 1239, Cowles Foundation for Research in Economics, Yale University.
  7. Laurian Lungu & Patrick Minford, 2006. "Explaining The Equity Risk Premium," Manchester School, University of Manchester, vol. 74(6), pages 670-700, December.
  8. Alberto Giovannini & Philippe Weil, 1989. "Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model," NBER Working Papers 2824, National Bureau of Economic Research, Inc.
  9. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.

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