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The Importance of Timing Attitudes in Consumption-Based Asset Pricing Models

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  • Andreasen, Martin M.
  • Jørgensen, Kasper

Abstract

A new utility kernel for Epstein-Zin-Weil preferences is proposed to disentangle the intertemporal elasticity of substitution (IES), the relative risk aversion (RRA), and the timing attitude. These new preferences resolve two puzzles in the long-run risk model, where consumption growth is too strongly correlated with the price-dividend ratio and the risk-free rate. The proposed preferences also enable a New Keynesian model to match equity and bond premia with a low RRA of 5. Importantly, the mechanism enabling Epstein-Zin-Weil preferences to explain asset prices in these models is not to separate the IES from RRA, but to introduce a strong timing attitude.

Suggested Citation

  • Andreasen, Martin M. & Jørgensen, Kasper, 2020. "The Importance of Timing Attitudes in Consumption-Based Asset Pricing Models," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 95-117.
    • Handle: RePEc:eee:moneco:v:111:y:2020:i:c:p:95-117
    DOI: 10.1016/j.jmoneco.2019.01.008
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    Cited by:

    1. Martin M. Andreasen & Giovanni Caggiano & Efrem Castelnuovo & Giovanni Pellegrino, 2021. "Why Does Risk Matter More in Recessions than in Expansions?," Monash Economics Working Papers 2021-11, Monash University, Department of Economics.
    2. Oliver de Groot & Alexander W. Richter & Nathaniel A. Throckmorton, 2022. "Valuation risk revalued," Quantitative Economics, Econometric Society, vol. 13(2), pages 723-759, May.
    3. Fu, Qi & So, Jacky Yuk-Chow & Li, Xiaotong, 2024. "Stable paretian distribution, return generating processes and habit formation—The implication for equity premium puzzle," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    4. Martin M. Andreasen, 2021. "The New Keynesian Model and Bond Yields," CREATES Research Papers 2021-01, Department of Economics and Business Economics, Aarhus University.
    5. Meissner, Thomas & Pfeiffer, Philipp, 2022. "Measuring preferences over the temporal resolution of consumption uncertainty," Journal of Economic Theory, Elsevier, vol. 200(C).
    6. Xu, Shaojun, 2023. "Behavioral asset pricing under expected feedback mode," International Review of Financial Analysis, Elsevier, vol. 86(C).
    7. Martin M. Andreasen & Giovanni Caggiano & Efrem Castelnuovo & Giovanni Pellegrino, 2021. "Why Does Risk Matter More in Recessions than in Expansions?," "Marco Fanno" Working Papers 0275, Dipartimento di Scienze Economiche "Marco Fanno".
    8. Andreasen, Martin M. & Caggiano, Giovanni & Castelnuovo, Efrem & Pellegrino, Giovanni, 2024. "Does risk matter more in recessions than in expansions? Implications for monetary policy," Journal of Monetary Economics, Elsevier, vol. 143(C).
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    More about this item

    Keywords

    Bond premium puzzle; Equity premium puzzle; Early resolution of uncertainty; Long-run risk;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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