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Risk Aversion and Determinants of Stock Market Behavior

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  • Pindyck, Robert S

Abstract

A structural model of equity pricing is developed to address two related questions. First, to what extent do unanticipate d changes in such "fundamental" variables as profitability, real in terest rates, inflation, and the variance of returns explain observed stock returns? Second, how risk averse are investors in the aggregat e? The author finds that the pretax profit rate and the variance of r eturns are both significant explainers of the market, and interest ra tes somewhat less so. Estimates of the index of relative risk aversio n put that parameter in the range of 3 to 4. Copyright 1988 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 70 (1988)
Issue (Month): 2 (May)
Pages: 183-90

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Handle: RePEc:tpr:restat:v:70:y:1988:i:2:p:183-90

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  1. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, Elsevier, vol. 21(2), pages 129-158, July.
  2. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(2), pages 249-65, April.
  3. Officer, R R, 1973. "The Variability of the Market Factor of the New York Stock Exchange," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 46(3), pages 434-53, July.
  4. Mankiw, N Gregory & Rotemberg, Julio J & Summers, Lawrence H, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(1), pages 225-51, February.
  5. James M. Poterba & Lawrence H. Summers, 1984. "The Persistence of Volatility and Stock Market Fluctuations," NBER Working Papers 1462, National Bureau of Economic Research, Inc.
  6. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, Elsevier, vol. 8(4), pages 323-361, December.
  7. Feldstein, Martin, 1980. "Inflation, tax rules and the stock market," Journal of Monetary Economics, Elsevier, Elsevier, vol. 6(3), pages 309-331, July.
  8. Mervyn A. King & Jonathan I. Leape, 1984. "Wealth and Portfolio Composition: Theory and Evidence," NBER Working Papers 1468, National Bureau of Economic Research, Inc.
  9. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-80, Wharton School Rodney L. White Center for Financial Research.
  10. Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, American Economic Association, vol. 70(5), pages 839-47, December.
  11. Jeffrey A. Frankel, 1983. "A Test of Portfolio Crowding-Out and Related Issues in Finance," NBER Working Papers 1205, National Bureau of Economic Research, Inc.
  12. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, American Economic Association, vol. 65(5), pages 900-922, December.
  13. Pindyck, Robert S., 1983. "Risk, inflation, and the stock market," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1423-83., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  14. Benjamin M. Friedman, 1985. "Crowding Out or Crowding In? Evidence on Debt-Equity Substitutability," NBER Working Papers 1565, National Bureau of Economic Research, Inc.
  15. Stanley Fischer & Robert C. Merton, 1985. "Macroeconomics and Finance: The Role of the Stock Market," NBER Working Papers 1291, National Bureau of Economic Research, Inc.
  16. Zvi Bodie & Alex Kane & Robert L. McDonald, 1983. "Why Are Real Interest Rates So High?," NBER Working Papers 1141, National Bureau of Economic Research, Inc.
  17. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, Econometric Society, vol. 41(5), pages 867-87, September.
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Cited by:
  1. Hui Guo & Robert Whitelaw, 2005. "Uncovering the risk-return relation in the stock market," Working Papers, Federal Reserve Bank of St. Louis 2001-001, Federal Reserve Bank of St. Louis.
  2. Geert Bekaert & Eric Engstrom & Yuhang Xing, 2005. "Risk, uncertainty, and asset prices," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2005-40, Board of Governors of the Federal Reserve System (U.S.).
  3. Yoichiro Fujii & Yutaka Nakamura, 2010. "Equity premium under multiple background risks," Economics Bulletin, AccessEcon, vol. 30(2), pages 933-939.
  4. Tim BOLLERSLEV & Ray Y. CHOU & Narayanan JAYARAMAN & Kenneth F. KRONER, 1991. "Les modéles ARCH en finance : un point sur la théorie et les résultats empiriques," Annales d'Economie et de Statistique, ENSAE, ENSAE, issue 24, pages 1-59.
  5. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  6. Corrado, Charles J. & Jordan, Bradford D. & Miller, Thomas Jr. & Stansfield, John J., 2001. "Repricing and employee stock option valuation," Journal of Banking & Finance, Elsevier, Elsevier, vol. 25(6), pages 1059-1082, June.
  7. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 5-59.
  8. H. Naci Mocan & Stephen C. Billups & Jody Overland, 2000. "A Dynamic Model of Differential Human Capital and Criminal Activity," NBER Working Papers 7584, National Bureau of Economic Research, Inc.
  9. Hui Guo, 2002. "Stock market returns, volatility, and future output," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 75-86.
  10. Marjorie Flavin & Takashi Yamashita, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle," NBER Working Papers 6389, National Bureau of Economic Research, Inc.
  11. Flavin, Marjorie & Yamashita, Takashi, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio over the Life Cycle," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt89x293v9, Department of Economics, UC San Diego.

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