The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data

Dominique Pépin and Stephen Miller
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Dominique Pépin: CRIEF [Poitiers] - Centre de recherche sur l'intégration économique et financière [EA 2249] - UP - Université de Poitiers = University of Poitiers

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Abstract: We investigate the time variations of the relative risk aversion parameter of a U.S. representative agent using 60 years of stock market data. We develop a methodology to identify the variables that explain the variations of risk aversion, based on an asset pricing model without valuation (or preference) risk. In this framework, the variables that predict the excess return of a market index (but not the second moments) also explain the variations of risk aversion. To wit, the variables include the price-dividend ratio and the short-term interest rate. A shock on the dividend-price ratio exerts a positive, highly persistent, though modest, effect on risk aversion, while a shock on the short-term interest rate exerts a highly negative, less persistent effect. The resulting measure of risk aversion follows a macroeconomically and financially countercyclical pattern.

Keywords: Short-term interest rate; Return predictors; Time-varying risk aversion; Price-dividend ratio (search for similar items in EconPapers)
Date: 2020
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Published in SSRN Electronic Journal, 2020, ⟨10.2139/ssrn.3660949⟩

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Working Paper: The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04648224

DOI: 10.2139/ssrn.3660949

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