  The standard asset pricing models (the CCAPM and the Epstein-Zin non-expected
utility model) counterintuitively predict that equilibrium asset prices can
rise if the representative agent's risk aversion increases. If the income
effect, which implies enhanced saving as a result of an increase in risk
aversion, dominates the substitution effect, which causes the representative
agent to reallocate his portfolio in favour of riskless assets, the demand for
securities increases. Thus, asset prices are forced to rise when the
representative agent is more risk adverse. By disentangling risk aversion and
intertemporal substituability, we demonstrate that the risky asset price is an
increasing function of the coefficient of risk aversion only if the elasticity
of intertemporal substitution (EIS) exceeds unity. This result, which was first
proved par Epstein (1988) in a stationary economy setting with a constant risk
aversion, is shown to hold true for non-stationary economies with a variable or
constant risk aversion coefficient. The conclusion is that the EIS probably
exceeds unity.
