Substitution, Risk Aversion, Taste Shocks and Equity Premia

Details

Serval ID
serval:BIB_AE73B4D18603
Type
Article: article from journal or magazin.
Collection
Publications
Title
Substitution, Risk Aversion, Taste Shocks and Equity Premia
Journal
Journal of Applied Econometrics
Author(s)
Normandin M., St-Amour P.
ISSN
0883-7252
Publication state
Published
Issued date
1998
Peer-reviewed
Oui
Volume
13
Number
3
Pages
265-281
Language
english
Abstract
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.
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Create date
31/03/2009 13:34
Last modification date
20/08/2019 16:18
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