Asset Pricing with Endogenous State-Dependent Risk Aversion

Download or read book Asset Pricing with Endogenous State-Dependent Risk Aversion written by Rachida Ouysse and published by . This book was released on 2020 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present an economy where aggregate risk aversion is stochastic and state-dependent in response to information about the wider economy. A factor model is used to link aggregate risk aversion to the business cycle and to handle high-dimensionality of the information about the economy. Our estimated aggregate risk aversion is counter-cyclical and varies with news about economic booms and busts. We find new evidence of volatility clustering of risk aversion around recessions. In addition to the price of consumption risk associated with consumption risk, time variation in risk aversion introduces risk preferences as a new component of the risk premium.