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Time-Series Tests of a Non-Expected-Utility Model of Asset Pricing

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  • Alberto Giovannini
  • Philippe Jorion

Abstract

This paper provides two alternative estimation and testing procedures of a representative-agent model of asset pricing which relies on a particular parametrization of non-expected-utility preferences. The first is based on maximum-likelihood estimates, supplemented with an explicit model of time varying first and second moments (where the time-variation of second moments in modelled with an ARCH-Autoregressive Conditionally Heteroskedastic-process); the second is based on generalized-method-of moments estimates. We perform our tests on a data set that includes monthly observations of rates of return on US stock prices and US consumption of nondurables and services. Our results are directly comparable to a test of the dynamic capital asset pricing model performed by Hansen and Singleton (1983), and to a recent test of the model studied here performed by Epstein and Zin (1989).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3195.

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Date of creation: Dec 1989
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Publication status: published as European Economic Review, Vol. 37, no. 5 (1993): 1083-1100.
Handle: RePEc:nbr:nberwo:3195

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  1. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  2. Attanasio, Orazio P & Weber, Guglielmo, 1989. "Intertemporal Substitution, Risk Aversion and the Euler Equation for Consumption," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(395), pages 59-73, Supplemen.
  3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  4. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  5. repec:fth:harver:1421 is not listed on IDEAS
  6. Giovannini, Alberto & Jorion, Philippe, 1989. " The Time Variation of Risk and Return in the Foreign Exchange and Stock Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 307-25, June.
  7. 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.
  8. Bergman, Yaacov Z., 1985. "Time preference and capital asset pricing models," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 145-159, March.
  9. Alberto Giovannini & Philippe Weil, 1989. "Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model," NBER Working Papers 2824, National Bureau of Economic Research, Inc.
  10. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 29-42, February.
  11. Kreps, David M & Porteus, Evan L, 1979. "Dynamic Choice Theory and Dynamic Programming," Econometrica, Econometric Society, Econometric Society, vol. 47(1), pages 91-100, January.
  12. Matthew D. Shapiro & N. Gregory Mankiw, 1985. "Risk and Return: Consumption Beta Versus Market Beta," Cowles Foundation Discussion Papers 738, Cowles Foundation for Research in Economics, Yale University.
  13. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
  14. Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 231-62, June.
  15. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  16. Epstein, Larry G., 1988. "Risk aversion and asset prices," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(2), pages 179-192, September.
  17. Selden, Larry, 1978. "A New Representation of Preferences over "Certain A Uncertain" Consumption Pairs: The "Ordinal Certainty Equivalent" Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 1045-60, September.
  18. 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.
  19. 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.
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Cited by:
  1. Alvis, Camilo & Castrillón, Cristian, 2011. "Tamaño óptimo del gasto público colombiano: una aproximación desde la teoría del crecimiento endógeno," BORRADORES DEPARTAMENTO DE ECONOMÍA 008986, UNIVERSIDAD DE ANTIOQUIA - CIE.
  2. Lee, Wai, 1997. "Covariance risk, consumption risk, and international stock market returns," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 37(2), pages 491-510.
  3. Michel Normandin, 2003. "Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility," Cahiers de recherche 03-08, HEC Montréal, Institut d'économie appliquée.
  4. Stephen Satchell & Susan Thorp, 2008. "Scenario Analysis With Recursive Utility: Dynamic Consumption Plans For Charitable Endowments," CAMA Working Papers 2008-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
  6. Taiji Harashima, 2005. "An Estimate of the Elasticity of Intertemporal Substitution in a Production Economy," Macroeconomics, EconWPA 0508030, EconWPA.
  7. Robert R. Bliss & Nikolaos Panigirtzoglou, 2001. "Recovering risk aversion from options," Working Paper Series, Federal Reserve Bank of Chicago WP-01-15, Federal Reserve Bank of Chicago.
  8. Gordon, Stephen & Samson, Lucie & Carmichael, Benoit, 1995. "Finite-sample inferences about mean-standard deviation bounds for stochastic discount factors," Economics Letters, Elsevier, vol. 49(3), pages 295-300, September.
  9. Michel Normandin, 1999. "The Integration of Financial Markets and the Conduct of Monetary Policies: The Case of Canada and the United States," Cahiers de recherche CREFE / CREFE Working Papers, CREFE, Université du Québec à Montréal 67, CREFE, Université du Québec à Montréal.
  10. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(2), pages 298-345, April.
  11. Ni, Shawn & Raymon, Neil, 2004. "Price uncertainty and consumer welfare in an intertemporal setting," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(9), pages 1877-1901, July.
  12. Myung Hoon Yi & Changkyu Choi, 2006. "A GMM test of the precautionary saving hypothesis with nonexpected-utility preferences," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(1), pages 71-78.
  13. Anne Epaulard & Aude Pommeret, 2003. "Recursive Utility, Endogenous Growth, and the Welfare Cost of Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 672-684, July.
  14. Pommeret, Aude & Smith, William T., 2005. "Fertility, volatility, and growth," Economics Letters, Elsevier, vol. 87(3), pages 347-353, June.

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