Asset Pricing Implications of A Non-Expected Recursive Utility Function : A Review

Employing a recently developed non-expected recursive utility function in which intertemporal substitution and risk aversion are disentangled, this paper reviews general equilibrium asset pricing in a pure exchange representative consumer economy. Assuming that the growth rates of aggregate dividends are independently and identically distributed over time, closed-form formulas for stock and bond prices (and returns) and equity premium are derived. Using these formulas, various issues in asset pricing, including the respective roles played by the two disparate preference components: intertemporal substitution and risk aversion, are discussed