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Time-varying Risk Aversion and Asse Prices

Directory : Faculty : Intellectual Contributions

Intellectual Contribution by George Li

Contribution Title

Time-varying Risk Aversion and Asse Prices

Publication

Journal fo Banking and Finance, Volume 31, issue 1, January, 2007

Co-author

Year

2007

Description

This paper uses the consumption-based representative agent model in Campbell and Cochrane (1999) to provide three new insights into how investors' risk aversion affects asset prices. First, we show that a countercyclical variation of risk aversion drives a procyclical conditional risk premium and return volatility. Second, we show that a large value of risk aversion doesn't determine whether the equity premium and the risk-free rate puzzles can be resolved or not. Finally we show that when risk aversion is time-varying, a large value of risk aversion doesn't imply a large risk premium.

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