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The Rate of Risk Aversion May Be Lower Than You Think

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  • Kris Jacobs

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    Abstract

    This paper estimates the rate of relative risk aversion using Euler equations based on household-level consumption data. These Euler equations are implications of market structures that do not necessarily allow agents to perfectly insure themselves. The paper focuses on tests of the unconditional Euler equation. In representative-agent frameworks, this type of test leads to the most intuitively convincing rejections of asset-pricing models, such as the equity premium puzzle and the riskfree rate puzzle. When measurement error in consumption is ignored, Euler equation errors are not statistically different from zero for values of the rate of relative risk aversion between 1 and 3. When allowing for the presence of measurement error, conservative estimates of the rate of risk aversion for asset market participants indicate a value between 2 and 8. These findings suggest that the rate of risk aversion may be much lower than commonly thought. Consequently, market incompleteness is likely to be part of a resolution of asset pricing puzzles. A l'aide de données sur la consommation des ménages et d'équations d'Euler, cet article estime le taux d'aversion au risque relatif. Ces équations d'Euler sont les implications de structures de marché qui ne permettent pas toujours aux agents de s'assurer parfaitement. Cet article porte plus particulièrement sur des tests de l'équation d'Euler inconditionnelle. Dans le cadre d'un agent représentatif, ce type de test mène aux rejets les plus intuitivement convaincants des modèles d'évaluation d'actifs, comme l'énigme de la prime de risque et l'énigme du taux sans risque. Lorsque l'on ignore les erreurs de mesure de la consommation, les erreurs de l'équation d'Euler ne sont pas statistiquement différents de zéro pour les valeurs du taux d'aversion au risque relatif comprises entre 1 et 3. Lorsque l'on tient compte de la présence des erreurs de mesure, les estimations conservatrices du taux d'aversion au risque relatif pour les participants à un marché d'actifs indiquent une valeur entre 2 et 8. Ces résultats suggèrent que le taux d'aversion au risque pourrait être plus bas que ce qui est couramment perçu. Par conséquent, l'imperfection des marchés pourrait servir à résoudre les énigmes d'évaluation d'actifs.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-08.

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    Date of creation: 01 Jan 2002
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    Handle: RePEc:cir:cirwor:2002s-08

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    Keywords: Risk Aversion; Equity Premium Puzzle; Measurement Error; Synthetic Cohorts; Euler Equations; Asset Market Participation; Aversion au risque; Énigme de la prime de risque; Erreurs de mesure; Cohortes synthétiques; Équations d'Euler; Participation au marché des actifs;

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