Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5084868 | International Review of Financial Analysis | 2014 | 64 Pages |
Abstract
This paper examines determinants of stochastic relative risk aversion in conditional asset pricing models. Novel time-series specification tests are proposed as direct extensions of Guo, Wang, and Yang (2013, JMCB)'s model using nonlinear state-space models with heteroskedasticity. I then establish the following facts. First, the surplus consumption ratio implied by the external habit formation model is the most important determinant of relative risk aversion. Second, the CAY of Lettau and Ludvigson (2001a) without a look-ahead bias and the short term interest rate explain part of relative risk aversion. Third, the estimated risk aversion from 1957Q2 to 2010Q3 is countercyclical and positive. Finally, the selected models explain part of the momentum and the financial distress premiums.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Sungjun Cho,