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Implications of Quasi-Geometric Discounting on the Observable Sharpe Ratio

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  • Tack Yun
  • Wooheon Rhee

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

Suggested Citation

  • Tack Yun & Wooheon Rhee, 2004. "Implications of Quasi-Geometric Discounting on the Observable Sharpe Ratio," Econometric Society 2004 North American Summer Meetings 243, Econometric Society.
    • Handle: RePEc:ecm:nasm04:243
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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