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Canadian Excess Returns and State-Dependent Risk Aversion

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  • ST-AMOUR, Pascal
Abstract
A discrete-time asset pricing model is developed for the situation where the representative agent has state-dependent risk aversion. The limiting continuous-time case is obtained and contrasted with Breeden's (1979) consumption-based capital asset pricing model. The essential feature is the presence of an additional `concavity risk', which supplements the usual consumption risk. The implication is that consumption covariance is no longer forced to account for the entire observed premia, which can therefore be replicated at lower levels of risk aversion. Using Canadian wealth data compiled by Macklem (1994), as well as a leading indicator proxy for state variables, the model is estimated using TSE-300 data, based on the exact likelihood parameterisation for continuous-time models. Results reveal a counter-cyclical pattern to risk aversion, and a mean value well within what is considered as reasonable range.

Suggested Citation

  • ST-AMOUR, Pascal, 1995. "Canadian Excess Returns and State-Dependent Risk Aversion," Cahiers de recherche 9519, Université Laval - Département d'économique.
    • Handle: RePEc:lvl:laeccr:9519
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    File URL: http://www.ecn.ulaval.ca/w3/recherche/cahiers/1995/9519.ps
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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