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Substitution, Risk Aversion, Taste Shocks and Equity Premia

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Author Info
Michel Normandin (CREFE/UQAM)
Pascal St-Amour (Univeriste Laval)

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Abstract

This paper investigates the testable restrictions on the time-series behavior of equity premia implied by a representative agent model whose state- and time-non separable preferences are subject to taste shocks. The model nests state- and time-separable preferences with and without taste shocks as special cases. Empirically, the linearized Euler equations are estimated through Kalman filtering, allowing for conditional heteroscedasticity via a common factor GARCH process. With or without conditional heteroscedasticity, (i) the hypothesis that preferences are separable cannot be rejected, (ii) taste shocks influences are statistically significant, and (iii) taste shocks yield reasonable estimates of the coefficient of relative risk aversion. This last result occurs because taste shocks reproduce the large observed equity premium by shifting weight away from consumption risk in favor to taste risk. This paper is available at ftp://crefe.dse.uqam.ca/pub/cahiers/cah39.ps The whole WP list is at http://www.er.uqam.ca/nobel/crefe/cahiers.html

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Paper provided by EconWPA in its series Finance with number 9607001.

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Length: 29 pages
Date of creation: 03 Jul 1996
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Handle: RePEc:wpa:wuwpfi:9607001

Note: 29 pages, Postscript file
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Web page: http://129.3.20.41

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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  1. Minh Ha-Duong & Nicolas Treich, 2004. "Risk aversion, intergenerational equity and climate change," Post-Print halshs-00000680_v2, HAL. [Downloadable!]
    Other versions:
  2. 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 67, CREFE, Université du Québec à Montréal. [Downloadable!]
  3. Michel Normandin, 2006. "The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv," Cahiers de recherche 06-04, HEC Montréal, Institut d'économie appliquée. [Downloadable!]
  4. Minh Ha-Duong & Nicolas Treich, 1999. "Recursive Intergenerational Utility in Global Climate Risk Modeling," CIRANO Working Papers 99s-40, CIRANO. [Downloadable!]
  5. Aude POMMERET & William T. SMITH, 2004. "Fertility, Volatility, and Growth," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.08, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
  6. 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. [Downloadable!]
    Other versions:
  7. COUTURE Stephane & REYNAUD Arnaud, 2006. "Multi-stand Forest Management Under a Climatic Risk: Do time and Risk Preferences Matter?," Working Papers 06.17.210, LERNA, University of Toulouse. [Downloadable!]
  8. Howitt, Richard & Reynaud, Arnaud & Msangi, Siwa & Knapp, Keith, 2002. "Calibrated Stochastic Dynamic Models for Resource Management," 2002 Annual meeting, July 28-31, Long Beach, CA 19620, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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