Risk Attitudes of Bond Investors
40 Pages Posted: 5 May 2001
Date Written: January 2001
According to financial theory every security market has its typical risk and return characteristics. Tastes of investors are modeled by reasonable utility functions which directly correspond to the market price of risk in equilibrium. In this paper we measure the risk attitudes of bond investors which can be revealed from settled market prices. We present an equilibrium model which focuses on the stochastic behavior of tastes in addition to the dynamics of investor beliefs. From US Treasury Securities market data we extract the investors' behavior for the period of 1970 to 1998. The results indicate that investors' risk aversion declines with the level of interest rates.
Keywords: Risk attitudes, bond market, equilibrium pricing, tastes and beliefs, stochastic price behavior, Kalman filtering.
JEL Classification: G12, G13, D52
Suggested Citation: Suggested Citation