Asset Returns and State-Dependent Risk Preferences
AbstractWe propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the assets. Nous suggÃ©rons un modÃ¨le d'Ã©quilibre de prix des actifs oÃ¹ les prÃ©fÃ©rences de l'agent reprÃ©sentatif sont caractÃ©risÃ©es par une aversion contingente au risque. Nous obtenons une Ã©quation de valorisation oÃ¹ la prime de risque dÃ©pend du risque de prÃ©fÃ©rences en plus du risque de consommation habituel. Nous dÃ©veloppons une application empirique qui ne nÃ©cessite pas une forme fonctionnelle reliant l'aversion non-observable Ã des variables Ã©conomiques observables. Nos estimations sont basÃ©es sur une estimation en chaÃ®ne markovienne de Monte-Carlo pour des vraisemblances exactes de processus linÃ©aires de diffusion appliquÃ©es aux donnÃ©es en temps discret. Puisque le risque de consommation n'a plus Ã justifier seul la forte prime de risque observÃ©e sur les fonds propres, nos estimations contrastent fortement avec celles obtenues dans le cas standard oÃ¹ l'aversion au risque est constante. En particulier, nous trouvons des estimÃ©s de l'aversion a
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by American Statistical Association in its journal Journal of Business and Economic Statistics.
Volume (Year): 22 (2004)
Issue (Month): (July)
Contact details of provider:
Web page: http://www.amstat.org/publications/jbes/index.cfm?fuseaction=main
Other versions of this item:
- Stephen Gordon & Pascal St-Amour, 2003. "Asset Returns and State-Dependent Risk Preferences," CIRANO Working Papers 2003s-09, CIRANO.
- Gordon, Stephen & St-Amour, Pascal, 2003. "Asset Returns and State-Dependent Risk Preferences," Cahiers de recherche 0316, CIRPEE.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
You can help add them by filling out this form.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Welfare costs of the business cycle and the equity premium
by Stephen in Worthwhile Canadian Initiative on 2006-12-15 19:09:36
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading lists or Wikipedia pages:Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.