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Journal of Finance Vol. 44 No. 5 1989

The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

Chang Mo Ahn

The University of Texas at Dallas

Abstract

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.

DOI
10.1111/j.1540-6261.1989.tb02662.x
Volume
44
Issue
5
Pages
1411-1420
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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