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Intertemporal Substitution, Risk and the Time Series Behaviour of Consumption and Asset Returns

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  • Stanley E. Zin

Abstract

This paper studies the time series behaviour of aggregate consumption and asset returns when the representative agent does not (necessarily) maximize the expected value of a von Neumann-Morgenstern utility index. By assuming that agent's intertemporal preferences over stochastic consumption sequences have the multiperiod analogue of the Ordinal Certainty Equivalent representation of Selden (1978, 1979), testable implications for the joint behaviour of consumption and assets returns are derived. These preferences contain the conventional von Neumann-Morgenstern representation as a special case and allow for "risk preference" and "time preference" to be modelled independently. The model is estimated and tested using monthly U.S. data on non-durable consumption, treasury bill returns, and corporate bond returns.

Suggested Citation

  • Stanley E. Zin, 1987. "Intertemporal Substitution, Risk and the Time Series Behaviour of Consumption and Asset Returns," Working Paper 694, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:694
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    Cited by:

    1. Moresi, Serge, 1999. "Uncertain lifetime, risk aversion and intertemporal substitution," Economics Letters, Elsevier, vol. 62(2), pages 207-212, February.
    2. Kochov, Asen, 2018. "A behavioral definition of unforeseen contingencies," Journal of Economic Theory, Elsevier, vol. 175(C), pages 265-290.

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