The Implications of First-Order Risk Aversion for Asset Market Risk Premiums
Geert Bekaert (),
Robert Hodrick () and
No 4624, NBER Working Papers from National Bureau of Economic Research, Inc
Existing general equilibrium models based on traditional expected utility preferences have been unable to explain the excess return predictability observed in equity markets, bond markets, and foreign exchange markets. In this paper, we abandon the expected-utility hypothesis in favor of preferences that exhibit first-order risk aversion. We incorporate these preferences into a general equilibrium two-country monetary model, solve the model numerically, and compare the quantitative implications of the model to estimates obtained from U.S. and Japanese data for equity, bond and foreign exchange markets. Although increasing the degree of first-order risk aversion substantially increases excess return predictability, the model remains incapable of generating excess return predictability sufficiently large to match the data. We conclude that the observed patterns of excess return predictability are unlikely to be explained purely by time-varying risk premiums generated by highly risk averse agents in a complete markets economy.
JEL-codes: G12 F3 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (8) Track citations by RSS feed
Published as Journal of Monetary Economics, Vol. 40 (September 1997): 3-39.
Downloads: (external link)
Journal Article: The implications of first-order risk aversion for asset market risk premiums (1997)
Working Paper: The implications of first-order risk aversion for asset market risk premiums (1997)
Working Paper: The implications of first-order risk aversion for asset market risk premiums (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4624
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Series data maintained by ().