Risk Aversion and Determinants of Stock Market Behavior
Robert S. Pindyck
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
NBER Working Paper No. w1921
A simple model of equity pricing is developed to address two related questions. First, to what extent can unanticipated changes in such"fundamental" variables as profitability, real interest rates, inflation, and the variance of returns account for the observed behavior of the stockmarket? Second, how risk averse are investors in the aggregate?We find that the pretax profit rate and the variance of returns are both significant explanators of the market, and interest rates somewhat less so. Estimates of the index of relative risk aversion are obtained that put that parameter in the range of 3 to 4.
Number of Pages in PDF File: 24
Date posted: June 28, 2004