Asset Pricing with Horizon-Dependent Risk Aversion

Previous studies have shown that investor preference for positive skewness creates a potential premium on negatively skewed assets. In this paper, we attempt to explore the connection between investors’ skewness preferences and corresponding demand for a risk premium on asset returns. Using data from the Japanese stock market, we empirically study the significance of risk aversion with skewness preference that potentially delivers a premium. Compared to studies on other stock markets, our finding suggests that Japanese investors exhibit preference for positively skewed assets, but do not display dislike for ones that are negatively skewed. This implies that investors from different countries having dissimilar attitudes toward risk may possess different preferences toward positive skewness, which would result in a different magnitude of expected risk premium on negatively skewed assets.

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Dynamic General Equilibrium and T-Period Fund Separation

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109010000049 ◽

2010 ◽

Vol 45 (2) ◽

pp. 369-400 ◽

Cited By ~ 2

Author(s):

Anke Gerber ◽

Thorsten Hens ◽

Peter Woehrmann

Keyword(s):

Asset Pricing ◽

Risk Aversion ◽

General Equilibrium ◽

Asset Allocation ◽

Mutual Fund ◽

Asset Prices ◽

Dynamic General Equilibrium ◽

Discount Factors ◽

Equilibrium Asset Pricing ◽

Mutual Fund Separation

AbstractIn a dynamic general equilibrium model, we derive conditions for a mutual fund separation property by which the savings decision is separated from the asset allocation decision. With logarithmic utility functions, this separation holds for any heterogeneity in discount factors, while the generalization to constant relative risk aversion holds only for homogeneous discount factors but allows for any heterogeneity in endowments. The logarithmic case provides a general equilibrium foundation for the growth-optimal portfolio literature. Both cases yield equilibrium asset pricing formulas that allow for investor heterogeneity, in which the return process is endogenous and asset prices are determined by expected discounted relative dividends. Our results have simple asset pricing implications for the time series as well as the cross section of relative asset prices. It is found that on data from the Dow Jones Industrial Average, a risk aversion smaller than in the logarithmic case fits best.

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Asset pricing and risk aversion in the Spanish stock market

Journal of Banking & Finance ◽

10.1016/0378-4266(90)90054-6 ◽

1990 ◽

Vol 14 (2-3) ◽

pp. 351-369 ◽

Cited By ~ 8

Author(s):

Aurora Alonso ◽

Gonzalo Rubio ◽

Fernando Tusell

Keyword(s):

Asset Pricing ◽

Stock Market ◽

Risk Aversion ◽

Spanish Stock Market

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Ambiguous Information, Risk Aversion, and Asset Pricing

SSRN Electronic Journal ◽

10.2139/ssrn.1438126 ◽

2009 ◽

Cited By ~ 4

Author(s):

Philipp K. Illeditsch

Keyword(s):

Asset Pricing ◽

Risk Aversion ◽

Ambiguous Information ◽

Information Risk

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Dynamics of Equity Factor Returns and Asset Pricing

Journal of Financial Econometrics ◽

10.1093/jjfinec/nbaa031 ◽

2020 ◽

Author(s):

Stoyan V Stoyanov ◽

Francesco A Fabozzi

Keyword(s):

Asset Pricing ◽

Risk Aversion ◽

Heavy Tails ◽

Fat Tails ◽

Pricing Errors ◽

Highly Nonlinear ◽

Pricing Error ◽

Dynamics Of Correlations ◽

Factor Returns ◽

High Degree

Abstract In empirical equity asset pricing, the stochastic discount factor (SDF) is implicitly modeled as a linear function of equity factors and is influenced by the empirical properties of the factor returns. We investigate the pricing error introduced by a misspecified SDF which ignores each of the following established empirical phenomena: autocorrelation, dynamics of covariances, dynamics of correlations, and heavy tails for the conditional factor return distribution. We consider near-linear SDFs and nonlinear specifications characterized by a high degree of risk aversion. We find that assuming constant covariances or constant correlations can significantly overprice certain equity portfolios at all risk-aversion levels and that ignoring fat tails can lead to large pricing errors for some derivative assets for highly nonlinear SDFs.

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