What drives stochastic risk aversion?

Sungjun Cho

International Review of Financial Analysis, 2014, vol. 34, issue C, 44-63

Abstract: This paper examines determinants of stochastic relative risk aversion in conditional asset pricing models. Novel time-series specification tests are proposed as direct extensions of Guo, Wang, and Yang (2013, JMCB)'s model using nonlinear state-space models with heteroskedasticity. I then establish the following facts. First, the surplus consumption ratio implied by the external habit formation model is the most important determinant of relative risk aversion. Second, the CAY of Lettau and Ludvigson (2001a) without a look-ahead bias and the short term interest rate explain part of relative risk aversion. Third, the estimated risk aversion from 1957Q2 to 2010Q3 is countercyclical and positive. Finally, the selected models explain part of the momentum and the financial distress premiums.

Keywords: Time-varying relative risk aversion; ICAPM; Nonlinear state-space model with GARCH (search for similar items in EconPapers)
JEL-codes: 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 (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1057521914000787
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:finana:v:34:y:2014:i:c:p:44-63

DOI: 10.1016/j.irfa.2014.05.006

Access Statistics for this article

International Review of Financial Analysis is currently edited by B.M. Lucey

More articles in International Review of Financial Analysis from Elsevier
Bibliographic data for series maintained by Catherine Liu ().