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Hyperbolic or exponential time discounting function? Empirical est using a conditional Consumption Capital Asset Pricing Model

De La Bruslerie, Hubert; Coën, Alain (2020), Hyperbolic or exponential time discounting function? Empirical est using a conditional Consumption Capital Asset Pricing Model, Finance

Type
Article accepté pour publication ou publié
Date
2020
Journal name
Finance
Publisher
Presses universitaires de Grenoble
Metadata
Show full item record
Author(s)
De La Bruslerie, Hubert
Dauphine Recherches en Management [DRM]
Coën, Alain
University of Quebec at Montreal, Montreal, Quebec, Canada
Abstract (EN)
The main objective in this article is to shed new light on the term structure of subjective time preference rates using a conditional Consumption Capital Asset Pricing Model. Following Samuelson’s (1937)’s suggestion, we analyze the concept of “time consistency”. More precisely, we challenge the relevance of the exponential time discounting function assumption, which leads to a constant subjective time preference rate. First, we develop a parsimonious, consumption-based model of the term structure of interest rates. Second, we test its implications for US monthly data from 1970:4 to 2013:1. We use a bivariate two-factor model of inflation and real consumption (through a VAR-GARCH process) to condition the term premiums of bonds. Our results clearly cast doubt on the assumption of a flat term structure, as implied by the standard exponential discounting function. A decreasing term structure of time preference rates is reported. It is particularly clear for the 1991-2013 period. Our results give strong support for the hyperbolic time discounting function hypothesis and open the way for the hypothesis of time varying time preference rates.
Subjects / Keywords
discount rate; Subjective time preference rates; Consumption-based model; Interest term structure
JEL
G10 - General
E43 - Interest Rates: Determination, Term Structure, and Effects

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