TY  - JOUR
AU  - Epstein,Larry G.
AU  - Zin,Stanley E.
TI  - The Independence Axiom and Asset Returns
JF  - National Bureau of Economic Research Technical Working Paper Series
VL  - No. 109
PY  - 1991
Y2  - July 1991
UR  - http://www.nber.org/papers/t0109
L1  - http://www.nber.org/papers/t0109.pdf
N1  - Author contact info:
Larry Epstein
Department of Economics
Boston University
270 Bay State Road
Boston MA 02215
E-Mail: lepstein@bu.edu

Stanley E. Zin
Department of Economics
Leonard N. Stern School of Business
New York University
44 West 4th Street, Suite 7-91
New York, NY 10012-1126
Tel: 212/998-0121
E-Mail: stan.zin@nyu.edu
AB  - This paper integrates models of atemporal risk preference that relax the independence axiom into a recursive intertemporal asset-pricing framework. The resulting models are amenable to empirical analysis using market data and standard Euler equation methods. We are thereby able to provide the first non-laboratory-based evidence regarding the usefulness of several new theories of risk preference for addressing standard problems in dynamic economics. Using both stock and bond returns data, we find that a model incorporating risk preferences that exhibit firstorder risk aversion accounts for significantly more of the mean and autocorrelation properties of the data than models that exhibit only second-order risk aversion. Unlike the latter class of models which require parameter estimates that are outside of the admissible parameter space, e.g., negative rates of time preference, the model with first-order risk aversion generates point estimates that are economically meaningful. We also examine the relationship between first-order risk aversion and models that employ exogenous stochastic switching processes for consumption growth.
ER  -