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The Return to Wealth, Asset Pricing, and the Intertemporal Elasticity of Substitution

  • Thomas D. Tallarini

    (Jr., Federal Reserve Board)

  • Amir Yaron

    (Univ. of Pennsylvania (Wharton))

  • Ravi Bansal

    (Duke University (Fuqua))

We estimate a consumption-based asset pricing model with Epstein-Zin (1989) preferences. The intertemporal marginal rate of substitution (IMRS) depends on the return on total wealth. Rather than use the stock market as a proxy for wealth, we construct a more comprehensive return: we include the value of corporate equity and debt, durable goods (houses), and human capital. Our measure of human capital and its return is estimated jointly with the preference parameters. Our preliminary results are: the intertemporal elasticity of substitution is greater than one, the IMRS satisfies the Hansen-Jagannathan (1991) bound, and human capital comprises about 85 percent of total wealth, its return is about 6 percent per year (about 2 percentage points lower than equities) and has a Sharpe ratio that is about double that of equities.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 918.

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Date of creation: 2008
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Handle: RePEc:red:sed008:918
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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