Approximation bias in estimating risk aversion
The asymmetric approximation originally employed by Pratt (1964) to construct reduced-form measures of risk aversion s a downward bias when used for empirical estimation. Calculations based on recent survey data indicate that estimates from a symmetric approximation are generally three times larger than their asymmetric counterparts, a finding that may help to explain the equity premium puzzle.
Volume (Year): 4 (2003)
Issue (Month): 38 ()
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- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
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- Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
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- Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December. Full references (including those not matched with items on IDEAS)
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