 Asset Returns and State-Dependent Risk PreferencesStephen Gordon and Pascal St-Amour Cahiers de recherche from CIRPEE Abstract: We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the asests. Keywords: Asset pricing models; Bayesian analysis; continuous-time econometric models; data augmentation; equity premium puzzle; Markov chain Monte Carlo; risk aversion; state-dependent preferences; wealth (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:lvl:lacicr:0316 Access Statistics for this paper More papers in Cahiers de recherche from CIRPEE Contact information at EDIRC. |
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