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Counter-cyclical risk aversion

Title
Counter-cyclical risk aversion
Author
김건호
Keywords
Consumption-based capital asset pricing model; Time-varying risk aversion; Two-stage local linear regression; Consistency; Local-stationarity; Counter-cyclicality.
Issue Date
2014-12
Publisher
Elsevier Science B.V
Citation
Journal of Empirical Finance, 2014, 29, P.384-401
Abstract
The paper proposes a consistent estimator of time-varying risk aversion in consumption-based CAPM. Based on the Epstein-Zin-Weil (Epstein and Zin, 1989,1991; Weil, 1989) recursive utility, we derive the Euler equation in which risk aversion is a non-parametric function of time. The proxy variable method is utilized to replace the unobserved return to aggregate wealth in the Euler equation. The estimation of risk aversion is carried out based on a two-stage local-linear regression method. Given the estimate, we investigate the conventional wisdom in economics that risk aversion is counter-cyclical. The empirical results strongly support the counter-cyclicality of the risk aversion parameter. (C) 2014 Elsevier B.V. All rights reserved.
URI
https://www.sciencedirect.com/science/article/abs/pii/S0927539814000863
ISSN
0927-5398
DOI
10.1016/j.jempfin.2014.09.005
Appears in Collections:
COLLEGE OF ECONOMICS AND FINANCE[S](경제금융대학) > ECONOMICS & FINANCE(경제금융학부) > Articles
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