SFB 303 Discussion Paper No. A - 285
Author: Drees, Burkhard, and Bernhard Eckwert
Title: The Risk of Financial Assets and the Volatility of
their Equilibrium Prices when Agents have Non-Time-Separable
Preferences
Abstract: The relationship between risk and asset price
fluctuations is studied in a stochastic overlapping
generations asset pricing model with i.i.d. production
shocks. The non-separability of preferences is an important
factor in explaining the time paths of asset prices and
returns. We show that the impact of current consumption on
the relative degree of risk aversion in the future period is
crucial for the correlation between nominal share prices and
output shocks, and for the way how in equilibrium the
volatility of asset prices is related to risk. In particular,
if higher current consumption makes the agent more risk
averse in the future, then the market prices risk in such a
way that a risky asset exhibits less price volatility than a
relatively safe one.
Keywords:
JEL-Classification-Number:
Creation-Date: April 1990
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