Value and Patience: The Value Premium in a Dividend-Growth Model with Hyperbolic Discounting

Abstract

We show that in a consumption-based asset-pricing model with hyperbolic discounting leading to dynamically inconsistent time preferences value premium increases nonlin-early with the degree of discounting and thus affects cross section of returns. To test our model empirically, we relate the size of the value premium in 41 countries to the degree of hyperbolic discounting across those countries. The latter was found in an International Test of Risk Attitudes (INTRA). Our result is robust to the inclusion of other variables from INTRA, such as risk aversion, as well as micro- and macro-economic variables from the 41 countries.

Keywords: value premium, international evidence, Gordon growth model, hyperbolic time discounting, dynamically inconsistent preferences.

JEL Classification: C42, E20, G12, G15