Substitution, Risk Aversion, Taste Shocks and Equity Premia

Michel Normandin () and Pascal St-Amour ()

Cahiers de recherche from Université Laval - Département d'économique

Abstract: This paper investigates the testable restrictions on the time- series behavior of equity premia implied by a representative agent model whose state- and time-non-separable preferences are subject to taste shocks. The model nests state- and time-separable preferences with and without taste shocks as special cases. Empirically, the linearized Euler equations are estimated through Kalman filtering, allowing for conditional heteroscedasticity via a common factor GARCH process. With or without conditional heteroscedasticity, (i) the hypothesis that preferences are separable cannot be rejected, (ii) taste shocks influences are statistically significant, and (iii) taste shocks yield reasonable estimates of the coefficient of relative risk aversion. This last result occurs because taste shocks reproduce the large observed equity premium by shifting weight away from consumption risk in favor to taste risk.

New Economics Papers: this item is included in nep-mic
Date: 1996

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Related works:
Working Paper: Substitution, Risk Aversion, Taste Shocks and Equity Premia (1996)
Working Paper: Substitution, Risk Aversion, Taste Shocks and Equity Premia (1996)
Working Paper: Substitution, Risk Aversion, Taste Shocks and Equity Premia (1996)
Journal Article: Substitution, risk aversion, taste shocks and equity premia (1998)
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Persistent link: http://EconPapers.repec.org/RePEc:lvl:laeccr:9606

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