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The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

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  • Ahn, Chang Mo

Abstract

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate depending on the nature of the nonseparability. Copyright 1989 by American Finance Association.

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  • Ahn, Chang Mo, 1989. "The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate," Journal of Finance, American Finance Association, vol. 44(5), pages 1411-1420, December.
    • Handle: RePEc:bla:jfinan:v:44:y:1989:i:5:p:1411-20
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    Cited by:

    1. Bommier, Antoine & Lanz, Bruno & Zuber, Stéphane, 2015. "Models-as-usual for unusual risks? On the value of catastrophic climate change," Journal of Environmental Economics and Management, Elsevier, vol. 74(C), pages 1-22.
    2. Antoine Bommier, 2008. "Rational Impatience ?," Working Papers hal-00441880, HAL.
    3. Ton S van den Bremer & Frederick van der Ploeg, 2013. "Managing and Harnessing Volatile Oil Windfalls," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(1), pages 130-167, April.
    4. M. C. Freeman & I. R. Davidson, 1999. "Estimating the equity premium," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 236-246.
    5. Antoine Bommier, 2005. "Life-Cycle Theory for Human Beings," Working Papers hal-00441890, HAL.
    6. Antoine Bommier & Bruno Lanz & Stéphane Zuber, 2014. "Fair management of social risk," Documents de travail du Centre d'Economie de la Sorbonne 14017, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. Antoine Bommier & François Le Grand, 2019. "Risk Aversion and Precautionary Savings in Dynamic Settings," Management Science, INFORMS, vol. 65(3), pages 1386-1397, March.
    8. Antoine Bommier, 2006. "Mortality, Time Preference and Life-Cycle Models," Working Papers hal-00441888, HAL.

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