Consumption smoothing...

This paper develops and axiomatizes the model under which intertemporal preferences are decomposed into (1) timeless risk-preferences (2) time-preferences that are averse to variations in atemporal (objectively) risky prospects over time. Formally, we introduce a new behavioral notion, time-variability aversion, that is defined to mean that agent’s preferences possess the property in (2) that is distinct from timeless risk-aversion. This idea is captured by the agent selecting a sequence of discount factors (from a given set) that minimizes the present discounted value for a given utility stream. One of the results that strongly justify our postulates is that discount factors necessarily show gain/loss asymmetry once agent’s preferences becomes consistent over time. So the previously noted anomaly on the discounted utility becomes a norm under our representation. This representation is applied under uncertainty where an agent first considers time-variability aversion then considers subjective risk over state. Under the representative-agent economy, Euler equations also reflect time-variability aversion: the marginal rate of substitution is underweighted at good states and overweighted at bad states. Then the covariance between discount factors and asset payoffs (weighted by the marginal rate of substitution) determines the level of asset prices