Can risk aversion explain stock price volatility?

Stephen LeRoy

FRBSF Economic Letter, 2013, issue apr8

Abstract: Why are the prices of stocks and other assets so volatile? Efficient capital markets theory implies that stock prices should be much less volatile than actually observed, reflecting an unrealistic assumption that investors are risk neutral. If instead investors are assumed to be risk averse, predicted volatility is higher. However, models that incorporate investor avoidance of risk can explain real-world stock price volatility only under levels of risk aversion that are unrealistically high. Thus, price volatility remains unexplained.

Keywords: Stock; -; Prices (search for similar items in EconPapers)
Date: 2013
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