Subjective Discounting in an Exchange Economy

Erzo G. J. Luttmer; Thomas Mariotti

doi:10.1086/376954

Journal of Political Economy Vol. 111 No. 5 2003

Subjective Discounting in an Exchange Economy

Erzo G. J. Luttmer^1,2,3; Thomas Mariotti^4,5,6

¹ University of Minnesota · ² Federal Reserve Bank of Minneapolis · ³ Twin Cities Orthopedics · ⁴ Université Fédérale de Toulouse Midi-Pyrénées · ⁵ Centre for Economic Policy Research · ⁶ London School of Economics and Political Science

Abstract

This paper describes the equilibrium of a discrete‐time exchange economy in which consumers with arbitrary subjective discount factors and homothetic period utility functions follow linear Markov consumption and portfolio strategies. Explicit expressions are given for state prices and consumption‐wealth ratios. We provide an analytically convenient continuous‐time approximation and show how subjective rates of time preference affect risk‐free rates but not instantaneous risk‐return trade‐offs. Hyperbolic discount factors can be a source of return volatility, but they cannot be used to address asset pricing puzzles related to high‐frequency Sharpe ratios.

DOI: 10.1086/376954
Volume: 111
Issue: 5
Pages: 959-989
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Subjective Discounting in an Exchange Economy

Abstract

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