Endogenous discounting, investment and asset pricing. (3rd January 2021)

• Record Type: Journal Article
• Authors: Niu, Yingjie; Zhao, Siqi; Zou, Zhentao
• Is Part Of: International journal of finance & economics. Volume 28:Number 1(2023)
• Page Start: 644
• Page End: 650
• Publication Date: 2021-01-03
• Subjects: consumption -- endogenous discounting -- equity risk premium -- investment -- welfare gain; International finance -- Periodicals; Economics -- Periodicals; 332
• DOI: 10.1002/ijfe.2441
• Languages: English
• ISSNs: 1076-9307

Abstract

Abstract: We extend an equilibrium business cycle/asset pricing model of production and capital accumulation by introducing wealth‐dependent time preferences. First, we find that the aggregate consumption is no longer proportional to the output and the consumption volatility is always lower than the volatility of output. Second, the expected real growth rate is increasing in the capital stock, which leads to a twin‐peak shape of the world wealth distribution as shown in the data. With respect to financial markets, we show that the equity risk premium is reduced by the endogenous discounting and exhibits a cyclical pattern, which depends on the capital stock. Finally, time‐varying discount rate leads to welfare improvement and the welfare gain is decreasing in the capital stock.