Asset pricing with endogenous state-dependent risk aversion

Rachida Ouysse ()

No 2020-04, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We present an economy where aggregate risk aversion is stochastic and state-dependent in response to information about the wider economy. A factor model is used to link aggregate risk aversion to the business cycle and to handle high-dimensionality of the information about the economy. Our estimated aggregate risk aversion is counter-cyclical and varies with news about economic booms and busts. We find new evidence of volatility clustering of risk aversion around recessions. In addition to the price of consumption risk associated with consumption risk, time variation in risk aversion introduces risk preferences as a new component of the risk premium.

Keywords: Consumption-based capital asset pricing model; time-varying risk aversion; GMM estimation; Euler equations; mispricing; Counter-cyclicality. (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-01
New Economics Papers: this item is included in nep-dge and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:swe:wpaper:2020-04

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