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Implications of Quasi-Geometric Discounting on the Observable Sharpe Ratio

  • Tack Yun
  • Wooheon Rhee
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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

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File URL: http://repec.org/esNASM04/up.19500.1075323731.pdf
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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 243.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:243
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  1. Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
  2. Robert J. Shiller, 1982. "Consumption, Asset Markets, and Macroeconomic Fluctuations," NBER Working Papers 0838, National Bureau of Economic Research, Inc.
  3. John H Cochrane, 2003. "Where is the Market Going: Uncertain Facts and Novel Theories," Levine's Working Paper Archive 618897000000000762, David K. Levine.
  4. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  5. Lettau, Martin & Uhlig, Harald, 1997. "Preferences, Consumption Smoothing, and Risk Premia," CEPR Discussion Papers 1678, C.E.P.R. Discussion Papers.
  6. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
  7. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith Jr., 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," Temi di discussione (Economic working papers) 413, Bank of Italy, Economic Research and International Relations Area.
  8. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  9. 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.
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