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Term structure of discount rates under multivariate s-ordered consumption growth

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  • Christoph Heinzel

Abstract

The statistical relationship among future changes in consumption can be used to derive, under certain assumptions on investor preferences, an unambiguous effect on the term structure of discount rates. Thus, an increase in concordance in uncertain consumption growth has a negative impact on the term structure if, and only if, the representative investor is risk-averse and prudent (Gollier, Pricing the Planet's Future, Princeton University Press, 2013). Using multivariate s-concave stochastic orderings, this paper generalizes this relationship to multivariate higher-order risk preferences. The result under concordance is included for bivariate (1,1)-increasing concave orders. Similar generalizations arise for the good-specific discount rates and their relationships in a stochastic multi-good economy. In an approximate representation of the interest rate for the univariate case, the term-structure effects are controlled by the Ross coefficients of risk aversion. The effect on the term structure decreases with initial consumption for a given stochastic deterioration in the future consumption increments.

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Paper provided by INRA UMR SMART in its series Working Papers SMART - LERECO with number 14-01.

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Length: 24 pages
Date of creation: 2014
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Handle: RePEc:rae:wpaper:201401

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Keywords: term structure of discount rates; multivariate stochastic orders; multivariate higher-order risk aversion; good-specific discount rates; precautionary effect;

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