Review of Finance Vol. 20 No. 1 2016
Intertemporal Substitution and Equity Premium
open access
Abstract
This article presents a model that incorporates habit formation and long-run risks into the Epstein–Zin preferences, and reveals intertemporal substitution as a distinctive channel, separate from risk aversion, in generating key asset market phenomena. With habit formation, both the risk aversion and intertemporal substitution channels enhance the market price of short-run consumption risk. With long-run risks, intertemporal substitution reduces the market prices of long-run consumption risks, working against risk aversion. The contrasting effects of the intertemporal substitution channel drive key differences in the model implications of habit formation and long-run risks.
- DOI
- 10.1093/rof/rfv004
- Volume
- 20
- Issue
- 1
- Pages
- 403-445
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref