Canadian Excess Returns and State-Dependent Risk Aversion
AbstractA discrete-time asset pricing model is developed for the situation where the representative agent has state-dependent risk aversion. The limiting continuous-time case is obtained and contrasted with Breeden's (1979) consumption-based capital asset pricing model. The essential feature is the presence of an additional `concavity risk', which supplements the usual consumption risk. The implication is that consumption covariance is no longer forced to account for the entire observed premia, which can therefore be replicated at lower levels of risk aversion. Using Canadian wealth data compiled by Macklem (1994), as well as a leading indicator proxy for state variables, the model is estimated using TSE-300 data, based on the exact likelihood parameterisation for continuous-time models. Results reveal a counter-cyclical pattern to risk aversion, and a mean value well within what is considered as reasonable range.
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Bibliographic InfoPaper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9519.
Date of creation: 1995
Date of revision:
Other versions of this item:
- St-Amour, P., 1995. "Canadian Excess Returns and State-Dependent Risk Aversion," Papers 9519, Laval - Recherche en Politique Economique.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-05-25 (All new papers)
- NEP-FMK-1998-05-28 (Financial Markets)
- NEP-MIC-1998-05-25 (Microeconomics)
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