Risk Aversion and Determinants of Stock Market Behavior

Robert Pindyck

No 1921, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A simple model of equity pricing is developed to address two related questions. First, to what extent can unanticipated changes in such"fundamental" variables as profitability, real interest rates, inflation, and the variance of returns account for the observed behavior of the stockmarket? Second, how risk averse are investors in the aggregate?We find that the pretax profit rate and the variance of returns are both significant explanators of the market, and interest rates somewhat less so. Estimates of the index of relative risk aversion are obtained that put that parameter in the range of 3 to 4.

Date: 1986-05
Note: ME
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Published as Review of Economics and Statistics, vol. 70, no. 2, pp. 183-190, May 1988.

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Working Paper: Risk aversion and determinants of stock market behavior (1986)
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