Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model

Alberto Giovannini and Philippe Weil

No 2824, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: When tastes are represented by a class of generalized preferences which -- unlike traditional Von-Neumann preferences -- do not confuse behavior towards risk with attitudes towards intertemporal substitution, the true beta of an asset is, in general, an average of its consumption and market betas. We show that the two parameters measuring risk aversion and intertemporal substitution affect consumption and portfolio allocation decisions in symmetrical ways. A unit elasticity of intertemporal substitution gives rise to myopia in consumption-savings decisions (the future does not affect the optimal consumption plan), while a unit coefficient of relative risk aversion gives rise to myopia in portfolio allocation (the future does not affect optimal portfolio allocation). The empirical evidence is consistent with the behavior of intertemporal maximizers who have a unit coefficient of relative risk aversion and an elasticity of intertemporal substitution different from 1.

Date: 1989-01
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (106)

Downloads: (external link)
http://www.nber.org/papers/w2824.pdf (application/pdf)

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:nbr:nberwo:2824

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2824

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().