The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data

49 Pages Posted: 4 Sep 2020

See all articles by Dominique Pépin

Dominique Pépin

Universite de Poitiers

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Date Written: July 26, 2020

Abstract

We investigate the time variations of the relative risk aversion parameter of a U.S. representative agent using 60 years of stock market data. We develop a methodology to identify the variables that explain the variations of risk aversion, based on an asset pricing model without valuation (or preference) risk. In this framework, the variables that predict the excess return of a market index (but not the second moments) also explain the variations of risk aversion. To wit, the variables include the price-dividend ratio and the short-term interest rate. A shock on the dividend-price ratio exerts a positive, highly persistent, though modest, effect on risk aversion, while a shock on the short-term interest rate exerts a highly negative, less persistent effect. The resulting measure of risk aversion follows a macroeconomically and financially countercyclical pattern.

Keywords: Time-varying risk aversion, Price-dividend ratio, Short-term interest rate, Return predictors

JEL Classification: G10, G12, G17

Suggested Citation

Pépin, Dominique and Miller, Stephen M., The Time-Varying Nature of Risk Aversion: Evidence from 60 Years of U.S. Stock Market Data (July 26, 2020). Available at SSRN: https://ssrn.com/abstract=3660949 or http://dx.doi.org/10.2139/ssrn.3660949

Dominique Pépin

Universite de Poitiers

93 avenue du recteur Pineau
Poitiers, 86000
France

Stephen M. Miller (Contact Author)

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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