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
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Bibliographic InfoArticle provided by American Statistical Association in its journal Journal of Business and Economic Statistics.
Volume (Year): 22 (2004)
Issue (Month): (July)
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Web page: http://www.amstat.org/publications/jbes/index.cfm?fuseaction=main
Other versions of this item:
- Gordon, Stephen & St-Amour, Pascal, 2003. "Asset Returns and State-Dependent Risk Preferences," Cahiers de recherche 0316, CIRPEE.
- Stephen Gordon & Pascal St-Amour, 2003. "Asset Returns and State-Dependent Risk Preferences," CIRANO Working Papers 2003s-09, CIRANO.
- 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
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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
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