We show that a standard production economy model where consumers have Epstein-Zin preferences can jointly explain the low volatility of consumption growth and a high market price of risk with a low coefficient of relative risk aversion (5). Endogenous consumption smoothing increases the price of...

We examine how long-run consumption risk arises endogenously in a standard production economy model where the representative agent has Epstein-Zin preferences. Even when technology growth is i.i.d., optimal consumption smoothing induces highly persistent time-variation in expected consumption...