Seasonally Varying Preferences: Theoretical Foundations for an Empirical Regularity
Review of Asset Pricing Studies, Vol. 4, No. 1, pp. 39-77, 2014
Posted: 16 May 2014 Last revised: 20 May 2014
Date Written: May 1, 2014
We investigate an asset pricing model with preferences cycling between high risk aversion and low EIS in fall/winter and the reverse in spring/summer. Calibrating to consumption data and allowing plausible preference parameter values, we produce returns that match observed equity and Treasury returns across the seasons: risky returns are higher and risk-free returns are lower or stable in fall/winter, and they reverse in spring/summer. Further, risky returns vary more than risk-free returns. A novel finding is that both EIS and risk aversion must vary seasonally to match observed returns. Further, the degree of necessary seasonal change in EIS is small.
JEL Classification: E44, G11, G12
Suggested Citation: Suggested Citation