Asset Returns, Investment Horizons, and Intertemporal Preferences (Reprint 009)

Shmuel Kandel and Robert Stambaugh

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: A representative-agent pricing model with time-varying moments of consumption growth is used to analyze implications about means and volatilities of equity returns and interest rates, first-order autocorrelations of equity returns for various investment horizons, and R2’s in projections of equity returns for various horizons on predetermined financial variables. An analysis using non-expected-utility preferences reveals that high risk aversion is key in matching empirical benchmarks for average returns, but low intertemporal substitution is important in obtaining implications corresponding to estimates of volatilities, autocorrelations, and the predictability of returns.

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