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Risk Aversion and the Intertemporal Behavior of Asset Prices

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  • Stapleton, R C
  • Subrahmanyam, M G

Abstract

In this article, we characterize economies in which both cash flows and forward prices follow random walks. We show in the case of geometric random walks that the preferences of the representative investor are of the constant proportional risk- aversion type. We also show that conditions under which spot prices follow random walks and under which the equivalent martingale measure is non-state-dependent. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Stapleton, R C & Subrahmanyam, M G, 1990. "Risk Aversion and the Intertemporal Behavior of Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 677-693.
  • Handle: RePEc:oup:rfinst:v:3:y:1990:i:4:p:677-93
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    Cited by:

    1. Lüders, Erik, 2002. "Why Are Asset Returns Predictable?," ZEW Discussion Papers 02-48, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Wang, Jiang, 1959-, 1995. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Working papers 3839-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Derrick Huang, C. & Hu, Qing & Behara, Ravi S., 2008. "An economic analysis of the optimal information security investment in the case of a risk-averse firm," International Journal of Production Economics, Elsevier, vol. 114(2), pages 793-804, August.
    4. Guenter Franke & Richard C. Stapleton & Marti G. Subrahmanyam, 1999. "When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel," Finance 9904004, EconWPA.
    5. Bjarne Astrup Jensen & Jørgen Aase Nielsen, 2016. "How suboptimal are linear sharing rules?," Annals of Finance, Springer, pages 221-243.
    6. Ang, Andrew & Liu, Jun, 2007. "Risk, return, and dividends," Journal of Financial Economics, Elsevier, vol. 85(1), pages 1-38, July.
    7. Jiang Wang, 1995. "The Term Structure of Interest Rates in a Pure Exchange Economy with Heterogeneous Investors," NBER Working Papers 5172, National Bureau of Economic Research, Inc.
    8. Jiang, Wang, 1996. "The term structure of interest rates in a pure exchange economy with heterogeneous investors," Journal of Financial Economics, Elsevier, vol. 41(1), pages 75-110, May.
    9. Gerber, Hans U. & Shiu, Elias S. W., 1996. "Actuarial bridges to dynamic hedging and option pricing," Insurance: Mathematics and Economics, Elsevier, vol. 18(3), pages 183-218, November.
    10. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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