Working Paper: NBER ID: w3989
Authors: John Y. Campbell
Abstract: This paper proposes a new way to generalize the insights of static asset pricing theory to a multi-period setting. The paper uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model. In a homoskedastic lognormal selling, the consumption-wealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while asset risk premia are determined by the coefficient of relative risk aversion. Risk premia are related to the covariances of asset returns with the market return and with news about the discounted value of all future market returns.
Keywords: Asset Pricing; Consumption; Intertemporal Models
JEL Codes: G12; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| elasticity of intertemporal substitution in consumption (D15) | consumption-wealth ratio (E21) |
| coefficient of relative risk aversion (D11) | asset risk premia (G19) |
| market return (G19) | asset risk premia (G19) |
| news about future market returns (G17) | asset risk premia (G19) |
| market return (G19) | risk premia (G22) |
| news about future market returns (G17) | risk premia (G22) |