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

Martin M. Andreasen and Kasper Jørgensen

Journal of Monetary Economics, 2020, vol. 111, issue C, 95-117

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.

Keywords: Bond premium puzzle; Equity premium puzzle; Early resolution of uncertainty; Long-run risk (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jmoneco.2019.01.008

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