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How Much Would You Pay To Resolve Long-Run Risk?

  • Larry Epstein
  • Emmanuel Farhi
  • Tomasz Stralezcki

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment of how much it matters should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models.

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Paper provided by Harvard University OpenScholar in its series Working Paper with number 136671.

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Handle: RePEc:qsh:wpaper:136671
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  1. Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Macroeconomic Risk," American Economic Review, American Economic Association, vol. 97(2), pages 1-30, May.
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  9. L. Epstein & S. Zin, 2010. "First order risk aversion and the equity premium puzzle," Levine's Working Paper Archive 1400, David K. Levine.
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  14. Haluk Ergin & Todd Sarver, 2012. "Hidden Actions and Preferences for Timing of Resolution of Uncertainty," Discussion Papers 1567, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  29. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
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  31. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
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