INTERTEMPORAL ASSET PRICING WITHOUT CONSUMPTION DATA

This paper proposes a new way to generalize the insights of static ass et pricing theory to a multiperiod setting. The paper uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model. In a homoscedastic lognormal setting, the consumption-wealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while ass et risk premia are determined by the coefficient of relative risk aver sion. Risk premia are related to the covariances of asset returns with the market return and with news about the discounted value of all fut ure market returns.