Working Paper: NBER ID: w19541
Authors: Larry G. Epstein; Emmanuel Farhi; Tomasz Strzalecki
Abstract: Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny when calibrating preferences, 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 of how much it matters 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.
Keywords: long-run risk; temporal resolution; risk aversion; elasticity of intertemporal substitution
JEL Codes: E00; G00
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| model parameters (like persistence) (C59) | timing premium (C41) |
| modifying the endowment process (D14) | timing premium (C41) |
| higher persistence in the consumption process (D15) | higher timing premium (C41) |
| relative risk aversion (RRA) and EIS (D81) | willingness to pay for early resolution of risk (G22) |