The Journal of Finance

The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02662.x

CHANG MO AHN

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.

Jump‐Diffusion Processes and the Term Structure of Interest Rates

Published: 03/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02595.x

CHANG MO AHN, HOWARD E. THOMPSON

The authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump‐diffusion processes. Even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes, the traditional theory is not consistent under jump‐diffusion processes. It is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion.