 Asset Pricing with Endogenous Beliefs-Dependent Risk Aversion*Rachida Ouysse Journal of Financial Econometrics, 2023, vol. 21, issue 2, 368-411 Abstract: I present an economy where aggregate risk aversion is stochastic, exogenous, and beliefs-dependent. The preferences are conditionally isoelastic álaGordon and St-Amour (2004). Representative consumer forms expectations about aggregate aversion to growth states’ uncertainty and makes beliefs-contingent consumption and investment decisions. The consumer is rewarded for preferences risk in addition to consumption risk. The consumer’s attitudes toward uncertainty about the business cycle are countercyclical, mildly volatile, with volatility clustering in periods of economic bust. When evaluated on cross-sections of stock returns, the model generates economically small unconditional Euler errors. This article presents new evidence that conditioning on a data rich information filtration leads to substantial pricing improvements. There is increased volatility and clustering around recessions in information poor environment. Keywords: pricing errors; business cycle; beliefs-dependent preferences; risk aversion; countercyclical; isoelastic preferences (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:21:y:2023:i:2:p:368-411. Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.