Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model

34 Pages Posted: 23 Aug 2000 Last revised: 21 Sep 2010

See all articles by Philippe Weil

Philippe Weil

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Alberto Giovannini

Columbia University - Columbia Business School

Date Written: 1989

Abstract

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.

Suggested Citation

Weil, Philippe and Giovannini, Alberto, Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model (1989). NBER Working Paper No. w2824. Available at SSRN: https://ssrn.com/abstract=228025

Philippe Weil (Contact Author)

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4220 (Phone)
+32 2 650 4475 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alberto Giovannini

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
80
Abstract Views
1,558
rank
316,829
PlumX Metrics