TY  - JOUR
AU  - Bekaert,Geert
AU  - Hodrick,Robert J.
AU  - Marshall,David A.
TI  - The Implications of First-Order Risk Aversion for Asset Market Risk Premiums
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4624
PY  - 1994
Y2  - January 1994
UR  - http://www.nber.org/papers/w4624
L1  - http://www.nber.org/papers/w4624.pdf
N1  - Author contact info:
Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu

Robert J. Hodrick
Graduate School of Business
Columbia University
3022 Broadway
New York, NY 10027
Tel: 212/854-3413
Fax: 212/316-9219
E-Mail: rh169@columbia.edu

David Marshall
Federal Reserve Bank of Chicago
230 South La Salle Street
Chicago, IL 60690
E-Mail: david.marshall@chi.frb.org
AB  - Existing general equilibrium models based on traditional expected utility preferences have been unable to explain the excess return predictability observed in equity markets, bond markets, and foreign exchange markets.  In this paper, we abandon the expected-utility hypothesis in favor of preferences that exhibit first-order risk aversion.  We incorporate these preferences into a general equilibrium two-country monetary model, solve the model numerically, and compare the quantitative implications of the model to estimates obtained from U.S. and Japanese data for equity, bond and foreign exchange markets. Although increasing the degree of first-order risk aversion substantially increases excess return predictability, the model remains incapable of generating excess return predictability sufficiently large to match the data.  We conclude that the observed patterns of excess return predictability are unlikely to be explained purely by time-varying risk premiums generated by highly risk averse agents in a complete markets economy.
ER  -