What Drives Stochastic Risk Aversion?
53 Pages Posted: 13 Feb 2009 Last revised: 23 Apr 2011
Date Written: March 28, 2011
Abstract
I examine determinants of stochastic relative risk aversion in conditional asset pricing models. I propose new time-series specification tests with nonlinear tatespace models with heteroskedasticity. I then established the following facts. First, the surplus consumption ratio implied by the external habit formation model is the most important determinant of relative risk aversion. Second, the CAY of Lettau and Ludvigson (2001a) without a look-ahead bias and the short term interest rate explain part of relative risk aversion. Third, the estimated risk aversion from 1957:02 to 2010:03 is countercyclical and positive. Finally, the selected models explain part of the momentum and the financial distress premiums.
Keywords: Time-varying Relative Risk Aversion; ICAPM; Nonlinear State-Space Model with GARCH
JEL Classification: G12
Suggested Citation: Suggested Citation
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