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American Economic Review Vol. 104 No. 9 2014

How Much Would You Pay to Resolve Long-Run Risk?

Larry G. Epstein1; Emmanuel Farhi2; Tomasz Strzalecki3

1 Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215 (e-mail: ) · 2 Department of Economics, Harvard University, 1805 Cambridge Street, Cambridge, MA 02138, and NBER (e-mail: ) · 3 Strzalecki: Department of Economics, Harvard University, 1805 Cambridge Street, Cambridge, MA 02138 (e-mail: ).

Abstract

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models.

DOI
10.1257/aer.104.9.2680
Volume
104
Issue
9
Pages
2680-2697
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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