Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model / Alberto Giovannini, Philippe Weil.

Format:

Book

Author/Creator:

Giovannini, Alberto.

Contributor:

National Bureau of Economic Research.

Weil, Philippe.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2824.

NBER working paper series no. w2824

Language:

English

Subjects (All):

Investments--Mathematical models.

Investments.

Capital assets pricing model.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1989.

Cambridge, Massachusetts : National Bureau of Economic Research, 1989.

Summary:

When tastes are represented by a class of generalized preferences which -- unlike traditional Von-Neumann preferences -- do not confuse behavior towards risk with attitudes towards intertemporal substitution, the true beta of an asset is, in general, an average of its consumption and market betas. We show that the two parameters measuring risk aversion and intertemporal substitution affect consumption and portfolio allocation decisions in symmetrical ways. A unit elasticity of intertemporal substitution gives rise to myopia in consumption-savings decisions (the future does not affect the optimal consumption plan), while a unit coefficient of relative risk aversion gives rise to myopia in portfolio allocation (the future does not affect optimal portfolio allocation). The empirical evidence is consistent with the behavior of intertemporal maximizers who have a unit coefficient of relative risk aversion and an elasticity of intertemporal substitution different from 1.

Notes:

Print version record

1989.