Endogenous time-varying risk aversion and asset returns

Michele Berardi

Journal of Evolutionary Economics, 2016, vol. 26, issue 3, No 5, 601 pages

Abstract: Abstract Stylized facts about statistical properties for short horizon returns in financial markets have been identified in the literature, but a satisfactory understanding for their manifestation is yet to be achieved. In this work, we show that a simple asset pricing model with representative agent is able to generate time series of returns that replicate such stylized facts if the risk aversion coefficient is allowed to change endogenously over time in response to unexpected excess returns under evolutionary forces. The same model, under constant risk aversion, would instead generate returns that are essentially Gaussian. We conclude that an endogenous time-varying risk aversion represents a very parsimonious way to make the model match real data on key statistical properties, and therefore deserves careful consideration from economists and practitioners alike.

Keywords: Risk aversion; Returns; Asset prices; Financial markets (search for similar items in EconPapers)
JEL-codes: D83 G01 G02 G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Working Paper: Endogenous time-varying risk aversion and asset return (2012)
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DOI: 10.1007/s00191-015-0435-3

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