State Dependence Can Explain the Risk Aversion Puzzle

Risk aversion functions extracted from observed stock and option prices can be negative as shown by Aït-Sahalia and Lo (2000) and Jackwerth (2000).

Author(s):

Fousseni Chabi-Yo

Bank of Canada

Rene Garcia

EDHEC Business School

Eric Renault

University of North Carolina at Chapel Hill, CIREQ and CIRANO

We rationalize this puzzle by a lack of conditioning on latent state variables. Once properly conditioned, risk aversion functions and pricing kernels are consistent with economic theory. To differentiate between the various theoretical explanations in terms of heterogeneity of beliefs or preferences, market sentiment, state-dependent utility or regimes in fundamentals, we calibrate several consumption-based asset pricing models to match the empirical pricing kernel and risk aversion functions at different dates and over several years.

Pdf
State Dependence Can Explain the Risk Aversion Puzzle...
(-1.00 B)
Type: Working paper
Date: le 03/09/2007
Research Cluster : Finance

See Also

Financial Times ranks EDHEC Executive Education among the Top 10 worldwide
News
- 23-05-2022
EDHEC Business School’s executive education offers rank among the Top 10 globally...
EDHEC partners with VIVATECH 2022 and offers 400 tickets to EDHEC students
News
- 20-05-2022
EDHEC is once again a partner of the unmissable tech event of the year, Viva Technology...
(Invitation) Inauguration of the Management in Innovative Health Chair - May 30, 2022 in Paris
News
- 17-05-2022
Emmanuel Métais, Dean of EDHEC Business School and Christophe Durand, General Manager...
News
- 10-05-2022
Live on YouTube !