Counter-cyclical risk aversion

Kun Ho Kim

Journal of Empirical Finance, 2014, vol. 29, issue C, 384-401

Abstract: The paper proposes a consistent estimator of time-varying risk aversion in consumption-based CAPM. Based on the Epstein–Zin–Weil (Epstein and Zin, 1989, 1991; Weil, 1989) recursive utility, we derive the Euler equation in which risk aversion is a non-parametric function of time. The proxy variable method is utilized to replace the unobserved return to aggregate wealth in the Euler equation. The estimation of risk aversion is carried out based on a two-stage local-linear regression method. Given the estimate, we investigate the conventional wisdom in economics that risk aversion is counter-cyclical. The empirical results strongly support the counter-cyclicality of the risk aversion parameter.

Keywords: Consumption-based capital asset pricing model; Time-varying risk aversion; Two-stage local linear regression; Consistency; Local-stationarity; Counter-cyclicality (search for similar items in EconPapers)
JEL-codes: C13 C14 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539814000863
Full text for ScienceDirect subscribers only

Related works:
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:eee:empfin:v:29:y:2014:i:c:p:384-401

DOI: 10.1016/j.jempfin.2014.09.005

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().