The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data
Dominique Pépin () and
Stephen Miller ()
No 2020-09, Working papers from University of Connecticut, Department of Economics
We investigate the time variations of the relative risk aversion parameter of a U.S. representative agent using 60 years of stock market data. We develop a methodology to identify the variables that explain the variations of risk aversion, based on an asset pricing model without valuation (or preference) risk. In this framework, the variables that predict the excess return of a market index (but not the second moments) also explain the variations of risk aversion. To wit, the variables include the price-dividend ratio and the short-term interest rate. A shock on the dividend-price ratio exerts a positive, highly persistent, though modest, effect on risk aversion, while a shock on the short-term interest rate exerts a highly negative, less persistent effect. The resulting measure of risk aversion follows a macroeconomically and financially countercyclical pattern.
Keywords: Time-varying risk aversion; Price-dividend ratio; Short-term interest rate; Return predictors (search for similar items in EconPapers)
JEL-codes: G10 G12 G17 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-fmk, nep-ore, nep-rmg and nep-upt
Note: Stephen Miller is the corresponding author
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2020-09
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