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Asset Returns and State-Dependent Risk Preferences

  • Stephen Gordon
  • Pascal St-Amour

We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the assets. Nous suggérons un modèle d'équilibre de prix des actifs où les préférences de l'agent représentatif sont caractérisées par une aversion contingente au risque. Nous obtenons une équation de valorisation où la prime de risque dépend du risque de préférences en plus du risque de consommation habituel. Nous développons une application empirique qui ne nécessite pas une forme fonctionnelle reliant l'aversion non-observable à des variables économiques observables. Nos estimations sont basées sur une estimation en chaîne markovienne de Monte-Carlo pour des vraisemblances exactes de processus linéaires de diffusion appliquées aux données en temps discret. Puisque le risque de consommation n'a plus à justifier seul la forte prime de risque observée sur les fonds propres, nos estimations contrastent fortement avec celles obtenues dans le cas standard où l'aversion au risque est constante. En particulier, nous trouvons des estimés de l'aversion au risque qui sont (i) de niveau raisonnable, (ii) corrélés avec la consommation et les rendements et (iii) cohérents avec un risque additionnel de détention d'actifs.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2003s-09.

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Length: 34 pages
Date of creation: 01 Apr 2003
Date of revision:
Handle: RePEc:cir:cirwor:2003s-09
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