Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Independence Axiom and Asset Returns

Contents:

Author Info

  • Larry G. Epstein
  • Stanley E. Zin

Abstract

This paper integrates models of atemporal risk preference that relax the independence axiom into a recursive intertemporal asset-pricing framework. The resulting models are amenable to empirical analysis using market data and standard Euler equation methods. We are thereby able to provide the first non-laboratory-based evidence regarding the usefulness of several new theories of risk preference for addressing standard problems in dynamic economics. Using both stock and bond returns data, we find that a model incorporating risk preferences that exhibit firstorder risk aversion accounts for significantly more of the mean and autocorrelation properties of the data than models that exhibit only second-order risk aversion. Unlike the latter class of models which require parameter estimates that are outside of the admissible parameter space, e.g., negative rates of time preference, the model with first-order risk aversion generates point estimates that are economically meaningful. We also examine the relationship between first-order risk aversion and models that employ exogenous stochastic switching processes for consumption growth.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/t0109.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0109.

as in new window
Length:
Date of creation: Jul 1991
Date of revision:
Publication status: published as Epstein, Larry G. and Stanley E. Zin. "The Independence Axiom And Asset Returns," Journal of Empirical Finance, 2001, v8(5,Dec), 537-572.
Handle: RePEc:nbr:nberte:0109

Note: ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Gallant, A. Ronald & Hansen, Lars Peter & Tauchen, George, 1990. "Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 141-179.
  2. Shmuel Kandel & Robert F. Stambaugh, . "Asset Returns, Investment Horizons, and Intertemporal Preferences (Reprint 009)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 07-90, Wharton School Rodney L. White Center for Financial Research.
  3. Shmuel Kandel & Robert F. Stambaugh, 1991. "Asset Returns and Intertemporal Preferences," NBER Working Papers 3633, National Bureau of Economic Research, Inc.
  4. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of Security Market Data for Models of Dynamic Economies," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0089, National Bureau of Economic Research, Inc.
  5. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers, Queen's University, Department of Economics 665, Queen's University, Department of Economics.
  6. Fishburn, Peter C., 1983. "Transitive measurable utility," Journal of Economic Theory, Elsevier, Elsevier, vol. 31(2), pages 293-317, December.
  7. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 1065-92, July.
  8. Donald W.K. Andrews, 1989. "Asymptotics for Semiparametric Econometric Models: III. Testing and Examples," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 910, Cowles Foundation for Research in Economics, Yale University.
  9. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
  10. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, Econometric Society, vol. 55(1), pages 95-115, January.
  11. 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.
  12. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1269-86, September.
  13. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  14. Pakes, Ariel & Pollard, David, 1989. "Simulation and the Asymptotics of Optimization Estimators," Econometrica, Econometric Society, Econometric Society, vol. 57(5), pages 1027-57, September.
  15. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 185-200, January.
  16. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 263-86, April.
  17. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 15(2), pages 145-161, March.
  18. Conlisk, John, 1989. "Three Variants on the Allais Example," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 392-407, June.
  19. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 667-86, May.
  20. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
  21. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, Springer, vol. 2(1), pages 61-104, April.
  22. Kandel, S. & Stambaugh, R.F., 1990. "Asset Returns, Investment Horizons, And Intertemporal Preferences," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 7-90, Wharton School - Weiss Center for International Financial Research.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberte:0109. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.