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.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eva Carceles Poveda & Chryssi Giannitsarou, 2006.
"Asset pricing with adaptive learning,"
Computing in Economics and Finance 2006
25, Society for Computational Economics.
- Nick Netzer, 2009.
"Evolution of Time Preferences and Attitudes toward Risk,"
American Economic Review,
American Economic Association, vol. 99(3), pages 937-55, June.
- Nick Netzer, 2008. "Evolution of Time Preferences and Attitudes Towards Risk," TWI Research Paper Series 29, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Eva Carceles-Poveda & Chryssi Giannitsarou, 2007.
"Online Appendix to Asset Pricing with Adaptive Learning,"
carceles08, Review of Economic Dynamics.
When requesting a correction, please mention this item's handle: RePEc:man:cgbcrp:168. 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: (Marianne Sensier)
If references are entirely missing, you can add them using this form.