Term structure of discount rates under multivariate s-ordered consumption growth

Christoph Heinzel

No 14-01, Working Papers SMART from INRAE UMR SMART

Abstract: The statistical relationship among future changes in consumption can be used to derive, under certain assumptions on investor preferences, an unambiguous effect on the term structure of discount rates. Thus, an increase in concordance in uncertain consumption growth has a negative impact on the term structure if, and only if, the representative investor is risk-averse and prudent (Gollier, Pricing the Planet's Future, Princeton University Press, 2013). Using multivariate s-concave stochastic orderings, this paper generalizes this relationship to multivariate higher-order risk preferences. The result under concordance is included for bivariate (1,1)-increasing concave orders. Similar generalizations arise for the good-specific discount rates and their relationships in a stochastic multi-good economy. In an approximate representation of the interest rate for the univariate case, the term-structure effects are controlled by the Ross coefficients of risk aversion. The effect on the term structure decreases with initial consumption for a given stochastic deterioration in the future consumption increments.

Keywords: term structure of discount rates; multivariate stochastic orders; multivariate higher-order risk aversion; good-specific discount rates; precautionary effect (search for similar items in EconPapers)
JEL-codes: D81 E43 H43 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2014
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rae:wpaper:201401

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