  Is the elasticity of intertemporal substitution (EIS) more or less than one?
This question can be answered by confronting theoretical results of asset
pricing models with investor behaviour during episodes of stock market panic.
If we consider these episodes as periods of high risk aversion, then lower
asset prices are in fact associated with higher risk aversion. However,
according to theoretical models, risky asset price is an increasing function of
the coefficient of risk aversion only if the EIS exceeds unity. It may
therefore be concluded that the EIS must be more than one to reconcile theory
with the observed stock price decline during periods of panic.
