Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/281062 
Year of Publication: 
2024
Series/Report no.: 
SAFE Working Paper No. 413
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
Can consumption-based mechanisms generate positive and time-varying real term premia as we see in the data? I show that only models with time-varying risk aversion or models with high consumption risk can independently produce these patterns. The latter explanation has not been analysed before with respect to real term premia, and it relies on a small group of investors exposed to high consumption risk. Additionally, it can give rise to a "consumption-based arbitrageur" story of term premia. In relation to preferences, I consider models with both time-separable and recursive utility functions. Specifically for recursive utility, I introduce a novel perturbation solution method in terms of the intertemporal elasticity of substitution. This approach has not been used before in such models, it is easy to implement, and it allows a wide range of values for the parameter of intertemporal elasticity of substitution.
Subjects: 
term premia
consumption-based models
habit
long-run risk
limited arbitrage
high consumption volatility
recursive utility
solution methods
JEL: 
C65
E43
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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