Intertemporal Substitutability, Risk Aversion and Asset Prices

Dominique Pépin ()

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Abstract: Is the elasticity of intertemporal substitution (EIS) more or less than one? This question can be answered by confronting theoretical results of asset pricing models with investor behaviour during episodes of stock market panic. If we consider these episodes as periods of high risk aversion, then lower asset prices are in fact associated with higher risk aversion. However, according to theoretical models, risky asset price is an increasing function of the coefficient of risk aversion only if the EIS exceeds unity. It may therefore be concluded that the EIS must be more than one to reconcile theory with the observed stock price decline during periods of panic.

Keywords: stock market panics; risk aversion; elasticity of intertemporal substitution; asset prices; CCAPM (search for similar items in EconPapers)
Date: 2015-10
Note: View the original document on HAL open archive server: https://hal.science/hal-01154266v2
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Published in Economics Bulletin, 2015, 35 (4), pp.2233-2241

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Journal Article: Intertemporal Substitutability, Risk aversion and Asset Prices (2015)
Working Paper: Intertemporal Substitutability, Risk Aversion and Asset Prices (2015)
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