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Intertemporal Substitutability, Risk Aversion and Asset Prices

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  • Dominique Pepin

    (Axe 2 (2011-2016) : « Marchés, Cultures de consommation, Autonomie et Migrations » (MSHS Poitiers) - MSHS de Poitiers - Maison des sciences de l'homme et de la société de Poitiers - UP - Université de Poitiers = University of Poitiers - CNRS - Centre National de la Recherche Scientifique, CRIEF [Poitiers] - Centre de recherche sur l'intégration économique et financière - UP - Université de Poitiers = University of Poitiers)

Abstract

Is the elasticity of intertemporal substitution (EIS) more or less than one? This question can be answered by confronting theoretical results of asset pricing models with investor behaviour during episodes of stock market panic. If we consider these episodes as periods of high risk aversion, then lower asset prices are in fact associated with higher risk aversion. However, according to theoretical models, risky asset price is an increasing function of the coefficient of risk aversion only if the EIS exceeds unity. It may therefore be concluded that the EIS must be more than one to reconcile theory with the observed stock price decline during periods of panic.

Suggested Citation

  • Dominique Pepin, 2015. "Intertemporal Substitutability, Risk Aversion and Asset Prices," Post-Print hal-01154266, HAL.
    • Handle: RePEc:hal:journl:hal-01154266
    Note: View the original document on HAL open archive server: https://hal.science/hal-01154266v2
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    References listed on IDEAS

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    More about this item

    Keywords

    stock market panics; risk aversion; elasticity of intertemporal substitution; asset prices; CCAPM;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G0 - Financial Economics - - General

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