Year: 2015
Type: preprint
Abstract: Is the elasticity of intertemporal substitution (EIS) more or less than one? This question can be answered by confronting theoretical results of asset pricing models with investor behaviour during episodes of stock market panic. If we consider these episodes as periods of high risk aversion, then lower asset prices are in fact associated with higher risk aversion. However, according to theoretical models, risky asset price is an increasing function of the coefficient of risk aversion only if the EIS exceeds unity. It may therefore be concluded that the EIS must be more than one to reconcile theory with the observed stock price decline during periods of panic.
Author: Pepin, Dominique
Institutions: Université de Poitiers, Laboratoire d’Economie de Poitiers
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1539593223