The Independence Axiom and Asset Returns

Larry Epstein and Stanley Zin

No 109, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper integrates models of atemporal risk preference that relax the independence axiom into a recursive intertemporal asset-pricing framework. The resulting models are amenable to empirical analysis using market data and standard Euler equation methods. We are thereby able to provide the first non-laboratory-based evidence regarding the usefulness of several new theories of risk preference for addressing standard problems in dynamic economics. Using both stock and bond returns data, we find that a model incorporating risk preferences that exhibit firstorder risk aversion accounts for significantly more of the mean and autocorrelation properties of the data than models that exhibit only second-order risk aversion. Unlike the latter class of models which require parameter estimates that are outside of the admissible parameter space, e.g., negative rates of time preference, the model with first-order risk aversion generates point estimates that are economically meaningful. We also examine the relationship between first-order risk aversion and models that employ exogenous stochastic switching processes for consumption growth.

Date: 1991-07
New Economics Papers: this item is included in nep-fin
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Epstein, Larry G. and Stanley E. Zin. "The Independence Axiom And Asset Returns," Journal of Empirical Finance, 2001, v8(5,Dec), 537-572.

Downloads: (external link)
http://www.nber.org/papers/t0109.pdf (application/pdf)

Related works:
Journal Article: The independence axiom and asset returns (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberte:0109

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/t0109

Access Statistics for this paper

More papers in NBER Technical Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().