The Risk of Financial Assets and the Volatility of their Equilibrium Prices when Agents have Non-Time-Separable Preferences
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.
Year of publication: |
1990-04
|
---|---|
Authors: | Drees, Burkhard ; Eckwert, Bernhard |
Institutions: | University of Bonn, Germany |
Saved in:
Saved in favorites
Similar items by person
-
The price volatility of bubbly and non-bubbly assets when agents have non-time-seperable preferences
Drees, Burkhard, (1990)
-
A simple resolution of the excess volatility puzzle
Drees, Burkhard, (1990)
-
Price level fluctuations under the real bills doctrine and the quality theory
Drees, Burkhard, (1990)
- More ...