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

  • Larry Epstein
  • Emmanuel Farhi
  • Tomasz Strzalecki

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 speci ca- tions. 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 8366.

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