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Time Dependent Relative Risk Aversion

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Author Info
Enzo Giacomini
Michael Handel
Wolfgang K. Härdle

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Abstract

Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors’ behavior from a macroeconomic aspect (modeled by the investors’ pricing kernel and their relative risk aversion) using stocks and options data. Daily estimates of investors’ pricing kernel and relative risk aversion are obtained and used to construct and analyze a three-year long time-series. The first four moments of these time-series as well as their values at the money are the starting point of a principal component analysis. The relation between changes in a major index level and implied volatility at the money and between the principal components of the changes in relative risk aversion is found to be linear. The relation of the same explanatory variables to the principal components of the changes in pricing kernels is found to be log-linear, although this relation is not significant for all of the examined maturities.

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Publisher Info
Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-020.

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Length: 39 pages
Date of creation: Mar 2006
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Handle: RePEc:hum:wpaper:sfb649dp2006-020

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Related research
Keywords: risk aversion; pricing kernels; time dependent preferences;

Other versions of this item:

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51. [Downloadable!] (restricted)
    Other versions:
  2. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," Journal of Business, University of Chicago Press, vol. 51(4), pages 621-51, October. [Downloadable!] (restricted)
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

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  9. Yuri Golubev & Wolfgang Härdle & Roman Timonfeev, 2008. "Testing Monotonicity of Pricing Kernels," SFB 649 Discussion Papers SFB649DP2008-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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