Time Dependent Relative Risk Aversion

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Time Dependent Relative Risk Aversion

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Author : Enzo Giacomini
language : en
Publisher:
Release Date : 2017

Time Dependent Relative Risk Aversion written by Enzo Giacomini and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.

Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors' behavior from a macroeconomic aspect (modeled by the investors' pricing kernel and their relative risk aversion) using stocks and options data. Daily estimates of investors' pricing kernel and relative risk aversion are obtained and used to construct and analyze a three-year long time-series. The first four moments of these time-series as well as their values at the money are the starting point of a principal component analysis. The relation between changes in a major index level and implied volatility at the money and between the principal components of the changes in relative risk aversion is found to be linear. The relation of the same explanatory variables to the principal components of the changes in pricing kernels is found to be log-linear, although this relation is not significant for all of the examined maturities.

Measuring Risk Aversion

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Author : Donald J. Meyer
language : en
Publisher: Now Publishers Inc
Release Date : 2006

Measuring Risk Aversion written by Donald J. Meyer and has been published by Now Publishers Inc this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Business & Economics categories.

Provides a detailed discussion of the adjustment of risk references and how to go about making such adjustments to a common scale. By adjusting all information to this common scale, results across studies can be easily summarized and compared, and the body of information concerning risk aversion can be examined as a whole

Does Relative Risk Aversion Vary With Wealth Evidence From Households Portfolio Choice Data

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Author : Xuan Liu
language : en
Publisher:
Release Date : 2016

Does Relative Risk Aversion Vary With Wealth Evidence From Households Portfolio Choice Data written by Xuan Liu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.

We test whether relative risk aversion varies with wealth using the Panel Study of Income Dynamics data in the U.S. Our analytical results indicate the following implications. For each household, there are two channels through which the risky share responds to wealth fluctuations, the income channel and the habit channel. For across households, there are heterogeneous responses through both the habit channel and the income channel. Finally, two potential misspecification problems on time-varying relative risk aversion arise when both heterogeneous responses through the habit channel and the responses through the income channel are ignored. Our main empirical findings are to show the importance of the income channel and the heterogeneous responses, and to provide strong evidence of relative risk aversion varying with wealth, after correcting two misspecification problems.

Do Wealth Fluctuations Generate Time Varying Risk Aversion Micro Evidence On Individuals Asset Allocation

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Author : Markus K. Brunnermeier
language : en
Publisher:
Release Date : 2015

Do Wealth Fluctuations Generate Time Varying Risk Aversion Micro Evidence On Individuals Asset Allocation written by Markus K. Brunnermeier and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.

Recent asset pricing models depart from the standard time-separable CRRA preferences - by introducing additive habit formation, for example - so that wealth shocks produce transitory variation in agents' relative risk aversion. We investigate whether there is micro-level evidence in support of this proposed (negative) relationship between wealth shocks and relative risk aversion. To this end, we analyze two decades of panel data on household asset allocation from the PSID and CEX surveys. Using a variety of specifications, we find that the share of financial assets that households invest in risky assets is unaffected by shocks to their wealth. We also find that following in- and outflows of financial wealth, and, in particular, capital gains and losses, households rebalance only very little. But even controlling for this inertia, wealth shocks do not have economically significant effects on household asset allocation. Our results suggest that wealth fluctuations do not generate time-varying risk aversion.

An Asset Pricing Model With Time Varying Elasticity Of Intertemporal Substitution

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Author : Aleksandar Georgiev
language : en
Publisher:
Release Date : 2004

An Asset Pricing Model With Time Varying Elasticity Of Intertemporal Substitution written by Aleksandar Georgiev and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004 with categories.

The main message of this paper is that it is Elasticity of Intertemporal Substitution, which is at the heart of the asset pricing puzzles, not Risk Aversion. We illustrate that point, by first showing that under certainty a model, which allows for a separation of the two characteristics of preferences - the one in Epstein and Zin (1991), leads to a specification of the main pricing equation, which involves a measure of Elasticity of Intertemporal Substitution only and not a measure of Risk Aversion. We then resort to an approximation of the main asset pricing equation under uncertainty, to demonstrate the central role played by Elasticity of Intertemporal Substitution and to emphasize the importance of its variability. We illustrate that importance by showing that the model in Campbell and Cochrane (1999) is in fact based on time-varying Elasticity of Intertemporal Substitution rather then on time-varying Risk Aversion.The main contribution of the paper is to develop a discrete-time alternative to the two most popular recursive utility based asset pricing models. The model proposed in the paper, directly nests the standard one, while replicating and improving upon the two frequently cited advantages of the Epstein-Zin model. It allows for time-varying risk premia, associated with the two most popular asset pricing factors and it achieves separation of risk attitudes from attitudes towards time via constant relative risk aversion (CRRA) and time-varying Elasticity of Intertemporal Substitution.

An Investigation Of Asset Pricing Puzzles With Cyclical Risk Aversion And Intertemporal Substitution

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Author : Xian Yang
language : en
Publisher:
Release Date : 2001

An Investigation Of Asset Pricing Puzzles With Cyclical Risk Aversion And Intertemporal Substitution written by Xian Yang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.

Representative agent models that embed the Lucas-Breeden (Lucas (1978), Breeden (1979)) paradigm for explaining asset return differentials are generally regarded as inconsistent with the empirical data. Difficulties such as the equity premium puzzle (Mehra and Prescott (1985)), the risk free rate puzzle (Weil (1989)), etc., are well documented and it has been shown that these puzzles are very robust (Kocherlakota (1996), Campbell (1996) and Cochrane (1997) provide good surveys). Recently, however, several authors (Campbell and Cochrane (1999), Gordon and St. Amour (2000, 2001) and Bakshi and Chen (1996) are some examples) have pointed to time-varying risk aversion as a potential source of mis-specification that may account for these puzzles. However, risk aversion and intertemporal substitution are intertwined in these models, just as they are in the additive expected utility model, therefore it is impossible to interpret unambiguously which feature of preferences varies over the cycle. The preferences suggested by Epstein and Zin (1989) can separate the coefficient of relative risk aversion ('CRRA') from the elasticity of intertemporal substitution ('EIS') and allow average consumption growth to have a much smaller effect than consumption volatility on the risk free interest rate. This paper generalizes the model of Epstein and Zin (1989) by allowing the representative agent to display countercyclical risk aversion and assesses if such behavior can add to the explanation of various empirical phenomena that have been investigated in finance and macroeconomics, such as the Mehra and Prescott (1985) equity premium puzzle. I investigate various combinations of state dependent 'CRRA' with state dependent 'EIS'. In the case of constant ' EIS' and time varying 'CRRA', my results look very similar to those generated without state dependence. However, I also investigate the same model but with time varying 'EIS' and constant ' CRRA'. I find that a time varying 'EIS' provides delightful results. I also find that time varying 'EIS' combined with a time varying 'CRRA' leads to even better results. As a further check, I use my calibrated preference parameters to predict the long-term interest rate. The calibrated preference parameters lead to very sensible term structure predictions. I also investigate a similar problem in an open economy. Based on a two-country general equilibrium model, I investigate the asset pricing puzzles from a different angle; i.e. an analysis of the predictability of excess rates of return on discount bonds, equities and foreign money markets using regression analysis. My work in an open economy setting basically supports Bekaert, Hodrick and David (1997) conclusion. I find that when I introduce both time varying ' EIS' and 'CRRA' into my two country model, the improved predictability of excess returns is insignificant. My results uphold a stronger statement: incorporating first order risk aversion with a simple pattern for time varying risk aversion and intertemporal substitution does not help much either. But my findings do not rule out the possibility that there could exist a richer pattern of time varying [rho] and à such that the estimated ßs can match the stylized results.

Revisiting Asset Pricing With Uncertainty In Future Risk Aversion

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Author : Christian L. Goulding
language : en
Publisher:
Release Date : 2018

Revisiting Asset Pricing With Uncertainty In Future Risk Aversion written by Christian L. Goulding and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.

In asset pricing models, the indirect synchronizations of changes in time-varying relative risk aversion (RRA) with changes in elasticity of intertemporal substitution (EIS) and/or changes in consumption growth are overlooked confounding factors that limit our understanding of the role of time-varying RRA in asset pricing. I isolate away time-varying RRA from the confounders of perfectly synchronized changes in EIS and consumption growth and from other complexities. Holding EIS fixed under recursive utility and relaxing perfect correlation between RRA and consumption growth, I show that rare and short-lived stochastic shifts in RRA can explain major empirical asset pricing facts.

Risk Assessment

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Author : Georg Bol
language : en
Publisher: Springer Science & Business Media
Release Date : 2008-11-14

Risk Assessment written by Georg Bol and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008-11-14 with Business & Economics categories.

New developments in assessing and managing risk are discussed in this volume. Addressing both practitioners in the banking sector and research institutions, the book provides a manifold view on the most-discussed topics in finance. Among the subjects treated are important issues such as: risk measures and allocation of risks, factor modeling, risk premia in the hedge funds industry and credit risk management. The volume provides an overview of recent developments as well as future trends in the area of risk assessment.

Capital Markets Globalization And Economic Development

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Author : Benton E. Gup
language : en
Publisher: Springer Science & Business Media
Release Date : 2006-07-20

Capital Markets Globalization And Economic Development written by Benton E. Gup and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006-07-20 with Business & Economics categories.

Capital Markets, Globalization, and Economic Development consists of fourteen articles contributed by authors from Australia, Asia, Europe, South America, and the United States who provide a wide range of insights. The contributors include academics, government officials, and regulators. This book examines some of the capital market issues that economies face as they mature. These include, but are not limited to, credit ratings, financial regulation, infrastructure privatization and other timely topics.

Option Implied Risk Neutral Distributions And Risk Aversion

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Author : Jens Carsten Jackwerth
language : en
Publisher:
Release Date : 2008

Option Implied Risk Neutral Distributions And Risk Aversion written by Jens Carsten Jackwerth and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.