Substitution, risk aversion, taste shocks and equity premia
This paper gauges the relative contribution of risk aversion, inter-temporal substitution and taste shocks on postwar monthly US equity premia. The time-varying consumption, market, and taste risks involved in the Euler equations are recovered from a common factor GARCH process and the MLE are obtained by applying the Kalman filter. Empirically, (1) the market risk is the only source of risk that does not statistically affect the equity premia, and thus, the hypothesis that the coefficient of relative risk aversion corresponds to the reciprocal of the elasticity of inter-temporal substitution is not rejected; (2) the estimates are reasonable, so that the equity premium puzzle is circumvented; and (3) taste risks are quantitatively important in capturing excess returns movements. © 1998 John Wiley & Sons, Ltd.
Year of publication: |
1998
|
---|---|
Authors: | Normandin, Michel ; St-Amour, Pascal |
Published in: |
Journal of Applied Econometrics. - John Wiley & Sons, Ltd.. - Vol. 13.1998, 3, p. 265-281
|
Publisher: |
John Wiley & Sons, Ltd. |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Total Wealth, Consumption and Portfolio Shares: Evidence and Theory
Normandin, Michel, (1999)
-
An Empirical Analysis of U.S. Aggregate Portfolio Allocations
Normandin, Michel, (2005)
-
Recursive Measures of Total Wealth and Portfolio Return
Normandin, Michel, (2003)
- More ...