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Reinterpreting a Temporally Aggregated Consumption CAP Model

Luigi Ermini
Journal of Business & Economic Statistics
Vol. 9, No. 3 (Jul., 1991), pp. 325-328
DOI: 10.2307/1391297
Stable URL: http://www.jstor.org/stable/1391297
Page Count: 4
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Reinterpreting a Temporally Aggregated Consumption CAP Model
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Abstract

Recent literature has found that the coefficient of relative risk aversion estimated through consumption-based asset-pricing models is implausibly high, even when the phenomenon of temporal aggregation is taken into account. This article suggests that an IMA (1, 1) process be assumed as the generating mechanism of consumption, instead of the standard random-walk process. In this case, if the coefficient of the moving average component is negative, the implied value of the coefficient of relative risk aversion can be reduced to plausible levels. Some empirical and theoretical support for the IMA (1, 1) hypothesis is also presented and discussed.

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