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Asset Prices and Hyperbolic Discounting

  • Liutang Gong

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

  • William Smith

    (Department of Economics, Fogelman College of Business & Economics University of Memphis)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University
    The World Bank)

This paper explores the implications of hyperbolic discounting for asset prices and rates of return. Hyperbolic discounting has no effect on the equity premium. However, by making people less patient, causes stock prices to be lower, and interest rates higher, than with exponential discounting. In addition, hyperbolic discounting dampens the marginal effect of risk on stock prices, relative to the exponential case.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 8 (2007)
Issue (Month): 2 (November)
Pages: 397-414

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Handle: RePEc:cuf:journl:y:2007:v:8:i:1:p:397-414
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  1. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  2. Liutang Gong & William Smith & Heng-fu Zou, 2007. "Consumption and Risk with hyperbolic discounting," CEMA Working Papers 491, China Economics and Management Academy, Central University of Finance and Economics.
  3. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  4. 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.
  5. Heng-fu Zou, 1995. "The spirit of capitalism and savings behavior," CEMA Working Papers 79, China Economics and Management Academy, Central University of Finance and Economics.
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  7. Gong, Liutang & Zou, Heng-fu, 2002. "Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness," Journal of Economic Dynamics and Control, Elsevier, vol. 26(2), pages 247-270, February.
  8. Stephen Turnovsky, 1998. "Fiscal Policy, Elastic Labor Supply, and Endogenous Growth," Discussion Papers in Economics at the University of Washington 0068, Department of Economics at the University of Washington.
  9. Gurdip S. Bakshi & Zhiwu Chen, 1996. "The Spirit of Capitalism and Stock-Market Prices," CEMA Working Papers 511, China Economics and Management Academy, Central University of Finance and Economics.
  10. Svensson, L.E.O., 1988. "Portfolio Choice With Non-Expected Utility In Continuous Time," Papers 423, Stockholm - International Economic Studies.
  11. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  12. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Smith, William T, 2001. "How Does the Spirit of Capitalism Affect Stock Market Prices?," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1215-32.
  14. Liutang Gong & Heng-fu Zou, 1998. "Fiscal Policies in a Stochastic Model with Hyperbolic Discounting," CEMA Working Papers 103, China Economics and Management Academy, Central University of Finance and Economics.
  15. Gootzeit, Michael & Schneider, Johannes & Smith, William, 2002. "Marshallian recursive preferences and growth," Journal of Economic Behavior & Organization, Elsevier, vol. 49(3), pages 381-404, November.
  16. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  17. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  18. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  19. Liutang Gong & Heng-fu Zou, 2001. "Money, social status, and capital accumulation in a cash-in-advance model," CEMA Working Papers 55, China Economics and Management Academy, Central University of Finance and Economics.
  20. Robert J. Barro, 1999. "Ramsey Meets Laibson In The Neoclassical Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1125-1152, November.
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