Wealth Shocks and Risk Aversion
Author | : Ricardo M. Sousa |
Publisher | : |
Total Pages | : 48 |
Release | : 2009 |
ISBN-10 | : OCLC:1290278862 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Wealth Shocks and Risk Aversion written by Ricardo M. Sousa and published by . This book was released on 2009 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modern literature departs from time-separable constant relative risk aversion preferences to explain asset pricing facts. This deviation typically implies that wealth shocks generate transitory variations in agents' relative risk aversion and, possibly, portfolio re-allocations over time.I empirically analyze this relationship using U.S. macroeconomic data and find evidence for time-variation in portfolio shares that is consistent with counter-cyclical risk aversion. These results suggest, therefore, that wealth-dependent, habit-formation or loss and disappointment aversion utility functions are a good description of preferences.Controlling for observed versus expected asset returns, I also show that: (i) wealth effects are significant (although temporary) and there is no evidence of inertia contrary to Brunnermeier and Nagel (2006); and (ii) the consumption-wealth ratio (Lettau and Ludvigson, 2001), the labor income risk (Julliard, 2004) and the labor income-consumption ratio (Santos and Veronesi, 2006) partially explain changes in the risky asset share.