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 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 asests.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 0316.
Date of creation: 2003
Date of revision:
Asset pricing models; Bayesian analysis; continuous-time econometric models; data augmentation; equity premium puzzle; Markov chain Monte Carlo; risk aversion; state-dependent preferences; wealth;
Other versions of this item:
- Gordon S. & St-Amour P., 2004. "Asset Returns and State-Dependent Risk Preferences," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 241-252, July.
- 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; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-13 (All new papers)
- NEP-CFN-2003-04-13 (Corporate Finance)
- NEP-RMG-2003-04-13 (Risk Management)
You can help add them by filling out this form.
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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