Asset Returns and State-Dependent Risk Preferences

CIRPEE Working Paper No. 03-16

33 Pages Posted: 20 May 2003

See all articles by Pascal St-Amour

Pascal St-Amour

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute

Stephen Gordon

Universite Laval

Date Written: March 2003


We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the assets.

Keywords: Asset pricing models, Bayesian analysis, continuous-time econometric models, data augmentation, equity premium puzzle, Markov chain Monte Carlo, risk aversion, state-dependent preferences, wealth

JEL Classification: C110, D810, G120

Suggested Citation

St-Amour, Pascal and Gordon, Stephen, Asset Returns and State-Dependent Risk Preferences (March 2003). CIRPEE Working Paper No. 03-16. Available at SSRN: or

Pascal St-Amour (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Stephen Gordon

Universite Laval ( email )

Departement d'economique
Ste-Foy, Quebec G1K 7P4
(418) 656-2416 (Phone)
(418) 656-7798 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics