Hyperbolic or Exponential Time Discounting Function? Empirical Evidence Using a Conditional Consumption Capital Asset Pricing Model

44 Pages Posted: 18 Nov 2019

See all articles by Hubert de La Bruslerie

Hubert de La Bruslerie

Université Paris Dauphine

Alain Coen

Université du Québec à Montréal (UQÀM) - Graduate School of Business (ESG)

Date Written: September 3, 2019

Abstract

The main objective in this article is to shed new light on the term structure of subjective time preference rates using a conditional Consumption Capital Asset Pricing Model. Following Samuelson’s (1937)’s suggestion, we analyze the concept of “time consistency”. More precisely, we challenge the relevance of the exponential time discounting function assumption, which leads to a constant subjective time preference rate. First, we develop a parsimonious, consumption-based model of the term structure of interest rates. Second, we test its implications for US monthly data from 1970:4 to 2013:1. We use a bivariate two-factor model of inflation and real consumption (through a VAR-GARCH process) to condition the term premiums of bonds. Our results clearly cast doubt on the assumption of a flat term structure, as implied by the standard exponential discounting function. A decreasing term structure of time preference rates is reported. It is particularly clear for the 1991-2013 period. Our results give strong support for the hyperbolic time discounting function hypothesis and open the way for the hypothesis of time varying time preference rates.

Keywords: discount rate; Subjective time preference rates; Asset pricing; Consumption-based model; Interest term structure

JEL Classification: E43, G1

Suggested Citation

de La Bruslerie, Hubert and Coen, Alain, Hyperbolic or Exponential Time Discounting Function? Empirical Evidence Using a Conditional Consumption Capital Asset Pricing Model (September 3, 2019). Available at SSRN: https://ssrn.com/abstract=3447292 or http://dx.doi.org/10.2139/ssrn.3447292

Hubert De La Bruslerie (Contact Author)

Université Paris Dauphine ( email )

DRM Finance
Paris, 75116
France
(33) 1 44 05 44 05 (Phone)

Alain Coen

Université du Québec à Montréal (UQÀM) - Graduate School of Business (ESG) ( email )

P.O. Box 8888, Downtown Station
Succursale Centre Ville
Montreal, Quebec H3C 3P8
Canada
514-987-3000 (Phone)
418-681-2501 (Fax)

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