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Title:Time dependent relative risk aversion PDF Logo
Authors:Giacomini, Enzo
Handel, Michael
Härdle, Wolfgang Karl
Issue Date:2006
Series/Report no.:SFB 649 discussion paper 2006,020
Abstract:Risk management and the thorough understanding of the relations between financial markets and the standard theory of macroeconomics have always been among the topics most addressed by researchers, both financial mathematicians and economists. This work aims at explaining investors' behavior from a macroeconomic aspect (modeled by the investors' pricing kernel and their relative risk aversion) using stocks and options data. Daily estimates of investors' pricing kernel and relative risk aversion are obtained and used to construct and analyze a three-year long time-series. The first four moments of these time-series as well as their values at the money are the starting point of a principal component analysis. The relation between changes in a major index level and implied volatility at the money and between the principal components of the changes in relative risk aversion is found to be linear. The relation of the same explanatory variables to the principal components of the changes in pricing kernels is found to be log-linear, although this relation is not significant for all of the examined maturities.
Subjects:risk aversion
pricing kernels
time dependent preferences
JEL:C13
C22
G12
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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