NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk Aversion and Determinants of Stock Market Behavior

Robert S. Pindyck

NBER Working Paper No. 1921
Issued in May 1986
NBER Program(s):   ME

A simple model of equity pricing is developed to address two related questions. First, to what extent can unanticipated changes in such"fundamental" variables as profitability, real interest rates, inflation, and the variance of returns account for the observed behavior of the stockmarket? Second, how risk averse are investors in the aggregate?We find that the pretax profit rate and the variance of returns are both significant explanators of the market, and interest rates somewhat less so. Estimates of the index of relative risk aversion are obtained that put that parameter in the range of 3 to 4.

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Document Object Identifier (DOI): 10.3386/w1921

Published: Review of Economics and Statistics, vol. 70, no. 2, pp. 183-190, May 1988. citation courtesy of

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