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Term structure of discount rates under multivariate s-ordered consumption growth

Author

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  • Christoph Heinzel
Abstract
The statistical relationship among future changes in consumption can be used to derive, under certain assumptions on investor preferences, an unambiguous effect on the term structure of discount rates. Thus, an increase in concordance in uncertain consumption growth has a negative impact on the term structure if, and only if, the representative investor is risk-averse and prudent (Gollier, Pricing the Planet's Future, Princeton University Press, 2013). Using multivariate s-concave stochastic orderings, this paper generalizes this relationship to multivariate higher-order risk preferences. The result under concordance is included for bivariate (1,1)-increasing concave orders. Similar generalizations arise for the good-specific discount rates and their relationships in a stochastic multi-good economy. In an approximate representation of the interest rate for the univariate case, the term-structure effects are controlled by the Ross coefficients of risk aversion. The effect on the term structure decreases with initial consumption for a given stochastic deterioration in the future consumption increments.

Suggested Citation

  • Christoph Heinzel, 2014. "Term structure of discount rates under multivariate s-ordered consumption growth," Working Papers SMART 14-01, INRAE UMR SMART.
    • Handle: RePEc:rae:wpaper:201401
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    File URL: http://www6.rennes.inra.fr/smart/Media/Working-papers/WP14-01
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    References listed on IDEAS

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    Cited by:

    1. AJ A. Bostian & Christoph Heinzel, 2016. "Consumption Smoothing and Precautionary Saving under Recursive Preferences," FOODSECURE Working papers 44, LEI Wageningen UR.

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    More about this item

    Keywords

    term structure of discount rates; multivariate stochastic orders; multivariate higher-order risk aversion; good-specific discount rates; precautionary effect;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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