Time-Varying Risk Aversion and Unexpected Inflation

42 Pages Posted: 8 Feb 2009 Last revised: 10 Feb 2009

See all articles by Michael W. Brandt

Michael W. Brandt

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management

Abstract

We formulate a consumption-based asset pricing model in which aggregate risk aversion is time-varying in response to both news about consumption growth (as in a habit formation model) and news about inflation. We estimate our model and explore its pricing implications on the term structure of interest rates and the cross-section of stock returns. Our empirical results support the hypothesis that aggregate risk aversion varies in response to news about inflation. The induced time-variation in risk aversion does not appear to proxy for inflation uncertainty or economic growth.

Suggested Citation

Brandt, Michael W. and Wang, Kevin Q., Time-Varying Risk Aversion and Unexpected Inflation. Journal of Monetary Economics, Vol. 50, 2003, Available at SSRN: https://ssrn.com/abstract=1339673

Michael W. Brandt (Contact Author)

Duke University - Fuqua School of Business ( email )

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Kevin Q. Wang

University of Toronto - Joseph L. Rotman School of Management ( email )

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