Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/32157 
Year of Publication: 
2006
Series/Report no.: 
CoFE Discussion Paper No. 06/05
Publisher: 
University of Konstanz, Center of Finance and Econometrics (CoFE), Konstanz
Abstract: 
This paper presents a simple rational expectations model of intertemporal asset pricing. It shows that state-independent heterogeneous risk aversion of investors is likely to generate declining aggregate relative risk aversion. This leads to predictability of asset returns and high and persistent volatility. Stock market crashes may be observed if relative risk aversion differs strongly across investors. Then aggregate relative risk aversion may sharply increase given a small impairment in fundamentals so that asset prices may strongly decline. Changes in aggregate relative risk aversion may also lead to resistance and support levels as used in technical analysis. For numerical illustration we propose an analytical asset price formula.
Subjects: 
Aggregate relative risk aversion
Equilibrium asset price processes
Excess Volatility
Return predictability
Stock market crashes
JEL: 
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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