Using as a starting point a popular version of the utility function, we obtain a value for the risk aversion parameter as implied by the market equilibrium portfolio, that is, the mean-variance efficient portfolio with the maximum Sharpe ratio. Moreover, we obtain a value for the utility of the...

We explore how the demand for a risky asset can be decomposed into an investment effect and a hedging effect by all risk-averse investors. This question has been shown to be complex when considered outside of the mean-variance framework. We restrict dependence among returns on the risky assets...

The term “equity premium puzzle” was coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. The equity premium puzzle in considered one of the most significant questions in finance. A number of papers have explored the fundamental questions of why the premium exists and has not...

Utilizing the recently developed measure of global risk aversion by Xu (2017), we show that global risk aversion is a significant determinant of international equity correlations, consistently across all emerging markets examined. The positive effect of risk aversion on emerging market...

We present a durable consumption-based asset pricing model with Epstein-Zin preferences and the pricing kernel accommodating the long-run consumption risk. Consumption growth includes a small predictable component as in Bansal and Yaron (2004). The model is estimated with simple econometric...

Prices and investors' behavior are heavily influenced by risk aversion. As it is unobservable, estimating risk aversion has been challenging for a long time. This paper proposes using a Machine Learning approach (a combination of Autoencoder and Long-Short Term Memory) to estimate the...