Title: Asset pricing with endogenous state-dependent risk aversion
Authors: Rachida Ouysse - University of New South Wales (Australia) [presenting]
Abstract: The evidence on time varying risk aversion parameter in the consumption CAPM using a multinomial Logit model is revisited. We assume that the risk aversion is dependent on the economic conditions through a business cycle dummy variable which depends on a set of latent factors that determine the state of the economy. The model therefore implies two sets of conditional moments: those implied by Euler equation and those from the multinomial equation. We estimate the two systems jointly using the (continuously updated) generalized method of moments (GMM). In this new model, the average risk aversion parameter is determined by the latent variables that define the business cycle. We address issues of identification (or lack of identification) of the multinomial equation and how it translates into the stochastic discount factor.