Hyperbolic or exponential time discounting function?. Empirical evidence using a conditional Consumption Capital Asset Pricing Model

Hubert de La Bruslerie and Alain Coën

Finance, 2021, vol. 42, issue 2, 7-37

Abstract: The main objective in this article is to shed light on the term structure of subjective time preference rates using a conditional Consumption Capital Asset Pricing Model. More precisely, we challenge the relevance of the exponential time discounting function assumption, which leads to a constant subjective time preference rate. We alternatively consider the hypothesis of a set of different time preference rates depending on the investment time horizons referred to in the literature as the hyperbolic time discounting setting. This hypothesis is empirically tested using a bivariate two-factor model of inflation and real consumption to condition the term premiums of bonds as in La Bruslerie and Fouilloux (2014). We have considered US bond market monthly data from 1970:4 to 2013:1. Our results clearly cast doubt on the assumption of a flat term structure, as implied by the standard exponential discounting function. A decreasing term structure of time preference rates is reported. It is particularly clear for the 1991-2013 period. Our results give strong support for the hyperbolic time discounting function hypothesis.

Keywords: time discount rate; subjective time preference rates; asset pricing; consumption-based model; interest term structure (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cairn.info/load_pdf.php?ID_ARTICLE=FINA_422_0007 (application/pdf)
http://www.cairn.info/revue-finance-2021-2-page-7.htm (text/html)
restricted

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cai:finpug:fina_422_0007

Access Statistics for this article

More articles in Finance from Presses universitaires de Grenoble
Bibliographic data for series maintained by Jean-Baptiste de Vathaire ().