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Substitution, risk aversion, taste shocks and equity premia

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Author Info
Michel Normandin (Département des Sciences Economiques and Centre de Recherche sur l'Emploi et les Fluctuations Economiques, Université du Québec, Montréal, C.P. 8888, Succ. Centre Ville, Montréal, Québec, Canada, H3C 3P8)
Pascal St-Amour (Département d'Économique and Centre de Recherche en Économie et Finances Appliquées, Université Laval, Cité Universitaire, Québec, Canada, G1K 7P4)

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Abstract

This paper gauges the relative contribution of risk aversion, inter-temporal substitution and taste shocks on postwar monthly US equity premia. The time-varying consumption, market, and taste risks involved in the Euler equations are recovered from a common factor GARCH process and the MLE are obtained by applying the Kalman filter. Empirically, (1) the market risk is the only source of risk that does not statistically affect the equity premia, and thus, the hypothesis that the coefficient of relative risk aversion corresponds to the reciprocal of the elasticity of inter-temporal substitution is not rejected; (2) the estimates are reasonable, so that the equity premium puzzle is circumvented; and (3) taste risks are quantitatively important in capturing excess returns movements. © 1998 John Wiley & Sons, Ltd.

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File URL: http://qed.econ.queensu.ca:80/jae/1998-v13.3/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 13 (1998)
Issue (Month): 3 ()
Pages: 265-281
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Handle: RePEc:jae:japmet:v:13:y:1998:i:3:p:265-281

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  1. Minh Ha-Duong & Nicolas Treich, 2004. "Risk aversion, intergenerational equity and climate change," Post-Print halshs-00000680_v2, HAL. [Downloadable!]
    Other versions:
  2. Michel Normandin, 1999. "The Integration of Financial Markets and the Conduct of Monetary Policies: The Case of Canada and the United States," Cahiers de recherche CREFE / CREFE Working Papers 67, CREFE, Université du Québec à Montréal. [Downloadable!]
  3. Michel Normandin, 2006. "The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv," Cahiers de recherche 06-04, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
  4. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO. [Downloadable!]
  5. Aude POMMERET & William T. SMITH, 2004. "Fertility, Volatility, and Growth," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.08, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
  6. Michel Normandin, 2003. "Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility," Cahiers de recherche 03-08, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
    Other versions:
  7. COUTURE Stephane & REYNAUD Arnaud, 2006. "Multi-stand Forest Management Under a Climatic Risk: Do time and Risk Preferences Matter?," Working Papers 06.17.210, LERNA, University of Toulouse. [Downloadable!]
  8. Howitt, Richard & Reynaud, Arnaud & Msangi, Siwa & Knapp, Keith, 2002. "Calibrated Stochastic Dynamic Models for Resource Management," 2002 Annual meeting, July 28-31, Long Beach, CA 19620, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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