On the timing premium puzzle

Abstract

The long-run risk model has been criticized for implying an excessive timing premium (excessive willingness to pay for resolving consumption uncertainty early). In this paper, I argue that the criticism is misplaced: The agent’s timing premium is not to be compared with our own, because our horizons are not infinite and the timing premium turns out to be sensitive to the choice of the horizon. Furthermore, the agent’s preference for early resolution of uncertainty is neither essential nor necessary, in the first place, in explaining the equity premium of the long-run risk model.