School of Management, the University of Texas at Dallas, I wish to thank Ron Kudla, Lemma Senbet, Ken Singleton, René Stulz (the editor), an anonymous referee, and especially Richard Green and Howard Thompson for valuable comments, along with seminar participants at the University of Wisconsin-Madison, the third international convention of Korean Economists, and the 1988 WFA meetings. I am grateful to Richard Green for bringing the problem to my attention.
The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate
Article first published online: 30 APR 2012
1989 The American Finance Association
The Journal of Finance
Volume 44, Issue 5, pages 1411–1420, December 1989
How to Cite
AHN, C. M. (1989), The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate. The Journal of Finance, 44: 1411–1420. doi: 10.1111/j.1540-6261.1989.tb02662.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.