The Importance of Timing Attitudes in Consumption-Based Asset Pricing Models

Why Does Risk Matter More in Recessions than in Expansions?

“…These estimates imply that V t < 0, meaning that negative values of re ‡ect preferences for early resolution of risk. We …nd = 138, which is very similar to the estimate reported in Andreasen and Jørgensen (2020) when RRA = 10. Our estimate of is also extremely precise, with a bootstrapped standard error of 3:89.…”

“…The constant u 0 captures utility from government spending and goods produced and consumed within the household. As shown by Andreasen and Jørgensen (2020), the main reason for including u 0 is to separately control the level of the utility function and hence disentangle the timing attitude from relative risk aversion (RRA), which otherwise are tightly linked in the standard formulation of recursive preferences in Epstein and Zin (1989) and Weil (1990). To see this, note that (3) and ( 4) imply…”

“…Key features of this model are recursive preferences as in Epstein and Zin (1989), an uncertainty shock in the disturbance to the household's utility function, and nominal price stickiness as in Rotemberg (1982). We extend the model by consumption habits, the ‡exible formulation of recursive preferences in Andreasen and Jørgensen (2020), and cost-push shocks. This model is then estimated by matching stylized unconditional moments jointly with our nonlinear VAR impulse response functions to an uncertainty shock in both recessions and expansions.…”

Valuation risk revalued

“…1717 Andreasen and Jørgensen (2020) show how to decouple the household's timing attitude from the RA and IES. …”

“…Andreasen and Jørgensen (2020) show how to decouple the household's timing attitude from the RA and IES.18 Notice κ 1 is a function of the steady-state price-dividend ratio, z d . When the IES is 1,z d = β/(1 − β),which is equivalent to its value absent any risk.…”