Review of Financial Studies Vol. 23 No. 8 2010
Long-Run Risk through Consumption Smoothing
Abstract
[We examine how long-run consumption risk arises endogenously in a standard production economy model where the representative agent has Epstein-Zin preferences. We show that even when technology growth is i.i.d., optimal consumption smoothing induces long-run risk—highly persistent variation in expected consumption growth. As a consequence, the model can account for a high price of risk, although both consumption growth volatility and the coefficient of relative risk aversion are low. The asset pricing implications of endogenous long-run risk depend crucially on the persistence of technology shocks and investors' preference for the timing of resolution of uncertainty.]
- Volume
- 23
- Issue
- 8
- Pages
- 3190-3224
- Sources
- bibtex:phds-export.bib