Introduction of Leisure into the Stochastic Discount Factor of the Consumption-Based Capital Asset Pricing Model and Its Contribution to Household Utility: A Case Study of Iran

Document Type : Research Paper

Author

Associate Professor of Economics, Faculty of Business and Economics, Persian Gulf University, Bushehr, Iran

Abstract

This paper incorporates leisure as a risky factor into the stochastic discount factor (SDF) of the Consumption-Based Capital Asset Pricing Model (CCAPM) and estimates its contribution to household utility. To this end, Iranian economic data over the period 1979–2021 are employed. First, using a recursive preference function such as the Epstein–Zin utility function, the Euler equation is derived to incorporate a risky-leisure component. Subsequently, the parameters are estimated using the Generalized Method of Moments (GMM). The J-statistic confirms the validity of the instruments used in estimating the model parameters. The findings indicate that the share of leisure in the utility of Iranian households over the studied period is statistically significant and equals 0.158. Therefore, incorporating leisure as a risky factor within the CCAPM framework is justified, and this approach allows for the quantification of its contribution to household utility

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References

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