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

Author

Listed:
  • Thomas D. Tallarini

    (Jr., Federal Reserve Board)

  • Amir Yaron

    (Univ. of Pennsylvania (Wharton))

  • Ravi Bansal

    (Duke University (Fuqua))

Abstract

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.

Suggested Citation

  • Thomas D. Tallarini & Amir Yaron & Ravi Bansal, 2008. "The Return to Wealth, Asset Pricing, and the Intertemporal Elasticity of Substitution," 2008 Meeting Papers 918, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:918
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    References listed on IDEAS

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    Cited by:

    1. Pancrazi, Roberto, 2014. "How beneficial was the Great Moderation after all?," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 73-90.
    2. Yang, Wei, 2011. "Long-run risk in durable consumption," Journal of Financial Economics, Elsevier, vol. 102(1), pages 45-61, October.
    3. Elminejad, Ali & Havranek, Tomas & Irsova, Zuzana, 2022. "Relative Risk Aversion: A Meta-Analysis," MetaArXiv b8uhe, Center for Open Science.
    4. Na Guo & Peter N. Smith, 2012. "Durable Consumption, Long-Run Risk and The Equity Premium," Discussion Papers 12/37, Department of Economics, University of York.

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