Canadian Excess Returns and State-Dependent Risk Aversion

Pascal St-Amour

Cahiers de recherche from Université Laval - Département d'économique

Abstract: A discrete-time asset pricing model is developed for the situation where the representative agent has state-dependent risk aversion. The limiting continuous-time case is obtained and contrasted with Breeden's (1979) consumption-based capital asset pricing model. The essential feature is the presence of an additional `concavity risk', which supplements the usual consumption risk. The implication is that consumption covariance is no longer forced to account for the entire observed premia, which can therefore be replicated at lower levels of risk aversion. Using Canadian wealth data compiled by Macklem (1994), as well as a leading indicator proxy for state variables, the model is estimated using TSE-300 data, based on the exact likelihood parameterisation for continuous-time models. Results reveal a counter-cyclical pattern to risk aversion, and a mean value well within what is considered as reasonable range.

Date: 1995
New Economics Papers: this item is included in nep-fmk and nep-mic
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Working Paper: Canadian Excess Returns and State-Dependent Risk Aversion (1995)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:laeccr:9519

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