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Questions and Answers
How does the real risk-free rate change as individuals become more impatient?
How does the real risk-free rate change as individuals become more impatient?
What is the impact on the real risk-free rate when the variance of consumption growth increases?
What is the impact on the real risk-free rate when the variance of consumption growth increases?
How does an increase in γ affect the real risk-free rate according to the text?
How does an increase in γ affect the real risk-free rate according to the text?
What does the parameter γ represent in a power utility function?
What does the parameter γ represent in a power utility function?
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How does relative risk aversion change as γ decreases?
How does relative risk aversion change as γ decreases?
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What is the Elasticity of Intertemporal Substitution (EIS) when γ equals 1?
What is the Elasticity of Intertemporal Substitution (EIS) when γ equals 1?
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Which financial asset delivers the optimal amount of consumption smoothing?
Which financial asset delivers the optimal amount of consumption smoothing?
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What does the second term of (5) represent?
What does the second term of (5) represent?
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When is the risk-free asset return represented as E(1+Rt+1F)=1+Rt+1F=1/E(St+1)?
When is the risk-free asset return represented as E(1+Rt+1F)=1+Rt+1F=1/E(St+1)?
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What does equation (8) help us understand about the risk-free rate?
What does equation (8) help us understand about the risk-free rate?
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What happens to the relationship between SDF and R when Cov(St+1Rt+1) is negative?
What happens to the relationship between SDF and R when Cov(St+1Rt+1) is negative?
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What does the risk premium represent in equation (7)?
What does the risk premium represent in equation (7)?
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What is the meaning of the covariance term in the context of asset pricing?
What is the meaning of the covariance term in the context of asset pricing?
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Based on the information provided, what does a positive Cov(St+1Rt+1) indicate?
Based on the information provided, what does a positive Cov(St+1Rt+1) indicate?
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How can the formula E(1+Rt+1) = 1/E(St+1)-Cov(St+1Rt+1)/E(St+1) be rearranged?
How can the formula E(1+Rt+1) = 1/E(St+1)-Cov(St+1Rt+1)/E(St+1) be rearranged?
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In the context of asset pricing, what does a high SDF value correspond to?
In the context of asset pricing, what does a high SDF value correspond to?
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What do Figures 1 and 2 illustrate in terms of the relationship between Consumption and SDF?
What do Figures 1 and 2 illustrate in terms of the relationship between Consumption and SDF?
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If Cov(St+1Rt+1) is negative, what kind of relationship does it suggest between SDF and R?
If Cov(St+1Rt+1) is negative, what kind of relationship does it suggest between SDF and R?
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What is the key aspect of an asset's risk identified using the SDF approach?
What is the key aspect of an asset's risk identified using the SDF approach?
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For a log normally distributed random variable, what does E(en) = eE(n)+0.5Var(n) represent?
For a log normally distributed random variable, what does E(en) = eE(n)+0.5Var(n) represent?
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What is the formula for U'(C) when U(C)=C^(1-γ)/(1-γ)?
What is the formula for U'(C) when U(C)=C^(1-γ)/(1-γ)?
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What does ln(St+1)=ln(θ)-γ(ln(Ct+1)-ln(Ct)) represent?
What does ln(St+1)=ln(θ)-γ(ln(Ct+1)-ln(Ct)) represent?
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What does ln(θ)𝑒∆𝑐𝑡+1 = 𝛾2 - 𝛾𝐸∆𝑐𝑡+1 + 2𝑉𝑎𝑟(∆𝑐𝑡+1) calculate?
What does ln(θ)𝑒∆𝑐𝑡+1 = 𝛾2 - 𝛾𝐸∆𝑐𝑡+1 + 2𝑉𝑎𝑟(∆𝑐𝑡+1) calculate?
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What is the formula for 𝐹𝑅𝑡+1 in terms of ln(θ), 𝛾, 𝐸∆𝑐𝑡+1, and 𝑉𝑎𝑟(∆𝑐𝑡+1)?
What is the formula for 𝐹𝑅𝑡+1 in terms of ln(θ), 𝛾, 𝐸∆𝑐𝑡+1, and 𝑉𝑎𝑟(∆𝑐𝑡+1)?
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Individuals with high $\gamma$ have a higher preference for low volatility of consumption because:
Individuals with high $\gamma$ have a higher preference for low volatility of consumption because:
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Based on the information provided, how does an increase in $E(R_{t+1})$ affect an individual's savings (Ct)?
Based on the information provided, how does an increase in $E(R_{t+1})$ affect an individual's savings (Ct)?
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Which function represents a higher preference for low consumption volatility?
Which function represents a higher preference for low consumption volatility?
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In the context of the text, why do individuals with high $U''(C)/U'(C)$ respond more to changes in consumption growth volatility?
In the context of the text, why do individuals with high $U''(C)/U'(C)$ respond more to changes in consumption growth volatility?
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How does an individual's saving decision change as $\gamma$ increases?
How does an individual's saving decision change as $\gamma$ increases?
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Based on the formula $U'(C) = C - \gamma$, what happens to $U'(C)$ if there is a given change in $C$ and $\gamma$ increases?
Based on the formula $U'(C) = C - \gamma$, what happens to $U'(C)$ if there is a given change in $C$ and $\gamma$ increases?
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