TY - JOUR
AU - Giovannini, Alberto
AU - Weil, Philippe
TI - Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model
JF - National Bureau of Economic Research Working Paper Series
VL - No. 2824
PY - 1989
Y2 - 1989
DO - 10.3386/w2824
UR - http://www.nber.org/papers/w2824
L1 - http://www.nber.org/papers/w2824.pdf
N1 - Author contact info:
Alberto Giovannini
Via Monti Parioli 25
00197 Roma
Italy
E-Mail: alberto.giovannini@alum.mit.edu
Philippe Weil
Director, Universite Libre de Bruxelles
ECARES
50, Avenue Roosevelt CP 114
B-1050 Brussels BELGIUM
Tel: 32-2-650-4220
Fax: 32-2-650-4475
E-Mail: philippe.weil@ulb.ac.be
AB - 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.
ER -