The Return to Wealth, Asset Pricing, and the Intertemporal Elasticity of Substitution

We estimate a consumption-based asset pricing model with Epstein-Zin (1989) preferences. The intertemporal marginal rate of substitution (IMRS) depends on the return on total wealth. Rather than use the stock market as a proxy for wealth, we construct a more comprehensive return: we include the value of corporate equity and debt, durable goods (houses), and human capital. Our measure of human capital and its return is estimated jointly with the preference parameters. Our preliminary results are: the intertemporal elasticity of substitution is greater than one, the IMRS satisfies the Hansen-Jagannathan (1991) bound, and human capital comprises about 85 percent of total wealth, its return is about 6 percent per year (about 2 percentage points lower than equities) and has a Sharpe ratio that is about double that of equities.