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.
Creation-Date: April 1990
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