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Risk Aversion and Determinants of Stock Market Behavior

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  • Pindyck, Robert S

Abstract

A structural model of equity pricing is developed to address two related questions. First, to what extent do unanticipate d changes in such "fundamental" variables as profitability, real in terest rates, inflation, and the variance of returns explain observed stock returns? Second, how risk averse are investors in the aggregat e? The author finds that the pretax profit rate and the variance of r eturns are both significant explainers of the market, and interest ra tes somewhat less so. Estimates of the index of relative risk aversio n put that parameter in the range of 3 to 4. Copyright 1988 by MIT Press.

Suggested Citation

  • Pindyck, Robert S, 1988. "Risk Aversion and Determinants of Stock Market Behavior," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 183-190, May.
    • Handle: RePEc:tpr:restat:v:70:y:1988:i:2:p:183-90
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    Cited by:

    1. Hui Guo & Robert F. Whitelaw, 2006. "Uncovering the Risk–Return Relation in the Stock Market," Journal of Finance, American Finance Association, vol. 61(3), pages 1433-1463, June.
    2. Hou, Yang & Li, Steven, 2014. "The impact of the CSI 300 stock index futures: Positive feedback trading and autocorrelation of stock returns," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 319-337.
    3. repec:adr:anecst:y:1991:i:24:p:01 is not listed on IDEAS
    4. Dai, R., 2010. "Essays on pension finance and dynamic asset allocation," Other publications TiSEM 72fdbf1a-5a77-410d-bb4e-9, Tilburg University, School of Economics and Management.
    5. H. Naci Mocan & Stephen C. Billups & Jody Overland, 2005. "A Dynamic Model of Differential Human Capital and Criminal Activity," Economica, London School of Economics and Political Science, vol. 72(288), pages 655-681, November.
    6. Abootaleb Shirvani & Stoyan V. Stoyanov & Frank J. Fabozzi & Svetlozar T. Rachev, 2019. "Equity Premium Puzzle or Faulty Economic Modelling?," Papers 1909.13019, arXiv.org, revised Jan 2020.
    7. Mehmet Asutay & Primandanu Febriyan Aziz & Banjaran S. Indrastomo & Yusuf Karbhari, 2023. "Religiosity and Charitable Giving on Investors’ Trading Behaviour in the Indonesian Islamic Stock Market: Islamic vs Market Logic," Journal of Business Ethics, Springer, vol. 188(2), pages 327-348, November.
    8. Wan-Yi Chiu, 2021. "Mean-variance hedging in the presence of estimation risk," Review of Derivatives Research, Springer, vol. 24(3), pages 221-241, October.
    9. Munk, Claus, 2015. "Financial Asset Pricing Theory," OUP Catalogue, Oxford University Press, number 9780198716457.
    10. Tim Bollerslev & Ray Y. Chou & Narayanan Jayaraman & Kenneth F. Kroner - L, 1991. "es modéles ARCH en finance : un point sur la théorie et les résultats empiriques," Annals of Economics and Statistics, GENES, issue 24, pages 1-59.
    11. Corrado, Charles J. & Jordan, Bradford D. & Miller, Thomas Jr. & Stansfield, John J., 2001. "Repricing and employee stock option valuation," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1059-1082, June.
    12. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
    13. Samih Antoine Azar & Vera Karaguezian-Haddad, 2014. "Simulating the market coefficient of relative risk aversion," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-7, December.
    14. Flavin, Marjorie & Yamashita, Takashi, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio over the Life Cycle," University of California at San Diego, Economics Working Paper Series qt89x293v9, Department of Economics, UC San Diego.
    15. Yoichiro Fujii & Yutaka Nakamura, 2010. "Equity premium under multiple background risks," Economics Bulletin, AccessEcon, vol. 30(2), pages 933-939.
    16. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    17. Abootaleb Shirvani & Stoyan V. Stoyanov & Frank J. Fabozzi & Svetlozar T. Rachev, 2021. "Equity premium puzzle or faulty economic modelling?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1329-1342, May.
    18. Marjorie Flavin & Takashi Yamashita, 1998. "Owner-Occupied Housing and the Composition of the Household Portfolio Over the Life-Cycle," NBER Working Papers 6389, National Bureau of Economic Research, Inc.
    19. Hui Guo, 2002. "Stock market returns, volatility, and future output," Review, Federal Reserve Bank of St. Louis, vol. 84(Sep), pages 75-86.
    20. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    21. Hongwei Xing & Hanying Wang & Feiyang Cheng & Shouyu Yao, 2023. "Mispricing: failure to capture the risk preferences dependent on market states," Annals of Operations Research, Springer, vol. 330(1), pages 1-26, November.
    22. Zhao, Chunkai & Li, Xing, 2022. "Living under the shadow: Adverse childhood experiences and entrepreneurial behaviors in Chinese adults," Journal of Business Research, Elsevier, vol. 138(C), pages 239-255.

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