Asset Returns and State-Dependent Risk Preferences

Abstract

Le CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisationsmembres, d'une subvention d'infrastructure du ministère

On the Consequences of State Dependent Preferences for the Pricing of Financial Assets

“…Their basic finding is that risk aversion is strongly countercyclical, rising during recessions and falling during expansions. In addition, the Gordon and St.-Amour (2002) CRRA estimate moves opposite to the University of Michigan index of consumer confidence, a fact that is also broadly consistent with their finding of countercyclical risk aversion.…”

“…Strong empirical evidence to the contrary is provided by Gordon and St-Amour (2002) who postulate a model with time varying risk aversion not unlike the one to be considered here, and estimate the implied process on risk aversion arising from per capita consumption and financial return data. Their basic finding is that risk aversion is strongly countercyclical, rising during recessions and falling during expansions.…”

Volatility in Equilibrium: Asymmetries and Dynamic Dependencies

“…The wedge between the objective and risk-neutral expectation of the forward variance may alternatively be interpreted as a proxy for the aggregate degree of risk aversion in the market, and any temporal variation in the empirically observed variance risk premium thus indicative of changes in the way in which systematic risk is valued (see, e.g., Aït-Sahalia and Lo, 2000;Bollerslev, Gibson and Zhou, 2006a;Gordon and St-Amour, 2004). Although it might be difficult to contemplate systematic changes in the level of risk aversion at the frequencies emphasized here, time-varying volatility risk and time-varying attitudes toward risk likely both play a role in explaining the temporal variation in expected returns and risk premia (e.g., Bekaert, Engstrom and Xing, 2009).…”

Assessing the anchoring of inflation expectations

“…Over a variety of asset pricing models, there is agreement on counter-cyclical risk aversion which increases when marginal utility is high and decreases when marginal utility is low, see Campbell and Cochrane (1999), Rosenberg and Engle (2002) or Gordon and St-Amour (2004). Market volatility also features countercyclical movements.…”

“…Campbell and Cochrane 1999, Rosenberg and Engle 2002or Gordon and St-Amour 2004, risk aversion is supposed to be high (low) in precisely those periods when marginal utility is also high (low). This counter-cyclical property of risk aversion is also reflected in market volatility.…”