Aggregate stock market behavior and investors' low risk aversion

George Li

Journal of Economic Dynamics and Control, 2008, vol. 32, issue 7, 2349-2369

Abstract: This paper studies whether investors' high risk aversion can be avoided in a representative-agent model that is able to explain aggregate stock market behavior in the US financial market. We present a consumption-based asset pricing model with a representative agent who has a 'catching up with the Joneses' preference to show that high risk aversion can be avoided in a representative-agent model that can help explain many of the empirically observed properties of the aggregate stock market return, including the equity premium and risk-free rate puzzles, the predictability of long-horizon stock returns, and the 'leverage effect' in return volatility.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:32:y:2008:i:7:p:2349-2369

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