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Risk aversion, multivariate proxies and the behavior of asset returns

  • Kim Nummelin

    (Swedish School of Economics and Business Administration, Finland)

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    An asset pricing model with constant relative risk aversion (CRRA) is tested with data from Sweden for the period 1977-1990. As a proxy for consumption growth, we employ a return based mimicking portfolio. We find that significant structural shifts in the model parameters occur between 1977-83 and 1984-90. The results indicate that the goodness-of-fit for the model in the two subperiods is fairly good and the estimates of CRRA seem reasonable. However, contrary to the cross-sectional implications of the model, CRRAs implied from individual assets differ a lot from each other.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1994_2b.pdf
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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 7 (1994)
    Issue (Month): 2 (Autumn)
    Pages: 94-107

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    Handle: RePEc:fep:journl:v:7:y:1994:i:2:p:94-107
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    1. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    2. Frennberg, Per & Hansson, Bjorn, 1993. "Testing the random walk hypothesis on Swedish stock prices: 1919-1990," Journal of Banking & Finance, Elsevier, vol. 17(1), pages 175-191, February.
    3. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    4. 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, vol. 99(2), pages 263-86, April.
    5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    7. Ghysels, E & Hall, A., 1988. "A Test For Structural Stability Of Euler Conditions Parameters Estimated Via The Generalized Methods Of Moments Estimators," Cahiers de recherche 8837, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
    9. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
    10. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    11. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
    12. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    13. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
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