IDEAS home Printed from
   My bibliography  Save this paper

Estimating a Continuous-Time Asset Pricing Model with State-Dependent Risk Aversion


  • Gordon, Stephen


  • St-Amour, Pascal


We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. Since a common factor - the state of the world - influences both stock prices and preferences, 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 parametrizations 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 proposons un modèle d'agent représentatif de valorisation d'actifs dans lequel les préférences de l'agent sont caractérisées par une aversion contingente au risque. Dans la mesure où un facteur commun - l'état du monde - influence à la fois les prix des actifs et les préférences, nous retrouvons une équation d'Euler où les rendements excédentaires incorporent le risque de consommation et le risque de variations des préférences. Nous développons un modèle simple pouvant être estimé sans avoir à spécifier la forme fonctionnelle reliant l'aversion au risque aux variables d'état. Nos estimations sont basées sur des chaînes markoviennes de Monte-Carlo utilisant des vraisemblances exactes pour des processus de diffusion. Puisque les risques de consommation seuls ne suffisent plus à expliquer les primes de risques, nos estimations diffèrent sensiblement des résultats obtenus avec des préférences non-contingentes. En particulier, les coefficients d'aversion au risque sont (i) raisonnables par rapport aux valeurs acceptées, (ii) corrélés avec la consommation et les rendements et (iii) cohérents avec l'hypothèse de risque additionnel.

Suggested Citation

  • Gordon, Stephen & St-Amour, Pascal, 1997. "Estimating a Continuous-Time Asset Pricing Model with State-Dependent Risk Aversion," Cahiers de recherche 9711, Université Laval - Département d'économique, revised 08 Jun 1998.
  • Handle: RePEc:lvl:laeccr:9711

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Richard Blundell & Ian Walker, 1986. "A Life-Cycle Consistent Empirical Model of Family Labour Supply Using Cross-Section Data," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 539-558.
    2. Esther Duflo, 2003. "Grandmothers and Granddaughters: Old-Age Pensions and Intrahousehold Allocation in South Africa," World Bank Economic Review, World Bank Group, vol. 17(1), pages 1-25, June.
    3. Gary S. Becker, 1981. "A Treatise on the Family," NBER Books, National Bureau of Economic Research, Inc, number beck81-1, January.
    4. M. Browning & P. A. Chiappori, 1998. "Efficient Intra-Household Allocations: A General Characterization and Empirical Tests," Econometrica, Econometric Society, vol. 66(6), pages 1241-1278, November.
    5. Udry, Christopher, 1996. "Gender, Agricultural Production, and the Theory of the Household," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1010-1046, October.
    6. Peters, H Elizabeth, 1986. "Marriage and Divorce: Informational Constraints and Private Contracting," American Economic Review, American Economic Association, vol. 76(3), pages 437-454, June.
    7. Duncan Thomas, 1990. "Intra-Household Resource Allocation: An Inferential Approach," Journal of Human Resources, University of Wisconsin Press, vol. 25(4), pages 635-664.
    8. Lundberg, Shelly & Pollak, Robert A, 1994. "Noncooperative Bargaining Models of Marriage," American Economic Review, American Economic Association, vol. 84(2), pages 132-137, May.
    9. Marianne Bertrand & Sendhil Mullainathan & Douglas Miller, 2003. "Public Policy and Extended Families: Evidence from Pensions in South Africa," World Bank Economic Review, World Bank Group, vol. 17(1), pages 27-50, June.
    10. Manser, Marilyn & Brown, Murray, 1980. "Marriage and Household Decision-Making: A Bargaining Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 31-44, February.
    11. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, vol. 107(443), pages 933-955, July.
    12. Lundberg, Shelly & Pollak, Robert A, 1993. "Separate Spheres Bargaining and the Marriage Market," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 988-1010, December.
    13. Ellman, Ira Mark & Lohr, Sharon L., 1998. "Dissolving the relationship between divorce laws and divorce rates," International Review of Law and Economics, Elsevier, vol. 18(3), pages 341-359, September.
    14. Gray, Jeffrey S, 1998. "Divorce-Law Changes, Household Bargaining, and Married Women's Labor Supply," American Economic Review, American Economic Association, vol. 88(3), pages 628-642, June.
    15. Lundberg, Shelly J, 1988. "Labor Supply of Husbands and Wives: A Simultaneous Equations Approach," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 224-235, May.
    16. Leora Friedberg, 1998. "Did Unilateral Divorce Raise Divorce Rates? Evidence from Panel Data," NBER Working Papers 6398, National Bureau of Economic Research, Inc.
    17. Josh Angrist, 2000. "Consequences of Imbalanced Sex Ratios: Evidence from America's Second Generation," NBER Working Papers 8042, National Bureau of Economic Research, Inc.
    18. Rubalcava, L. & Thomas, D., 2000. "Family Bargaining and Welfare," Papers 00-10, RAND - Labor and Population Program.
    19. Richard Blundell & Pierre-André Chiappori & Costas Meghir, 2005. "Collective Labor Supply with Children," Journal of Political Economy, University of Chicago Press, vol. 113(6), pages 1277-1306, December.
    20. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    21. Chiappori, Pierre-Andre, 1988. "Rational Household Labor Supply," Econometrica, Econometric Society, vol. 56(1), pages 63-90, January.
    22. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-799, July.
    23. Parkman, Allen M, 1992. "Unilateral Divorce and the Labor-Force Participation Rate of Married Women, Revisited," American Economic Review, American Economic Association, vol. 82(3), pages 671-678, June.
    24. Chiappori, Pierre-Andre, 1992. "Collective Labor Supply and Welfare," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 437-467, June.
    25. McElroy, Marjorie B & Horney, Mary Jean, 1981. "Nash-Bargained Household Decisions: Toward a Generalization of the Theory of Demand," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(2), pages 333-349, June.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Pascal St-Amour & Stephen Gordon, 2000. "A Preference Regime Model of Bull and Bear Markets," American Economic Review, American Economic Association, vol. 90(4), pages 1019-1033, September.

    More about this item


    Asset pricing models; Bayesian analysis; continuous-time econometric models; data augmentation; equity premium puzzle; Markov-Chain Monte-Carlo; risk aversion; state-dependent preferences;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lvl:laeccr:9711. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Manuel Paradis). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.