How Much Would You Pay to Resolve Long-Run Risk?
AbstractThough risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles have ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models.
CitationEpstein, Larry G., Emmanuel Farhi, and Tomasz Strzalecki. 2014. "How Much Would You Pay to Resolve Long-Run Risk?" American Economic Review, 104 (9): 2680-97. DOI: 10.1257/aer.104.9.2680
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions
- G12 Asset Pricing; Trading Volume; Bond Interest Rates