Endogenous time-varying risk aversion and asset return
Stylized facts about statistical properties for short horizon returns in financial markets have been identified in the literature, but a common cause for their manifestation has yet to be found. We show that a simple asset pricing model with representative agent and rational expectations is able to generate time series of returns that replicate such stylized facts if the risk aversion coefficient is allowed to change endogenously over time in response to unexpected excess returns. The same model, under constant risk aversion, would instead generate returns that are essentially Gaussian. We conclude that an endogenous time-varying risk aversion represents a very parsimonious way to make the model match real data on key statistical properties, and therefore deserves careful consideration from economists and practitioners alike.
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- Nick Netzer, 2008.
"Evolution of Time Preferences and Attitudes Towards Risk,"
TWI Research Paper Series
29, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Nick Netzer, 2009. "Evolution of Time Preferences and Attitudes toward Risk," American Economic Review, American Economic Association, vol. 99(3), pages 937-55, June.
- Carceles-Poveda, Eva & Giannitsarou, Chryssi, 2007.
"Asset Pricing with Adaptive Learning,"
CEPR Discussion Papers
6223, C.E.P.R. Discussion Papers.
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