TY - JOUR
AU - Chou, Ray
AU - Engle, Robert F
AU - Kane, Alex
TI - Measuring Risk Aversion From Excess Returns on a Stock Index
JF - National Bureau of Economic Research Working Paper Series
VL - No. 3643
PY - 1991
Y2 - March 1991
DO - 10.3386/w3643
UR - http://www.nber.org/papers/w3643
L1 - http://www.nber.org/papers/w3643.pdf
N1 - Author contact info:
Ray Y. Chou
E-Mail: rchou@econ.sinica.edu.tw
Robert F. Engle III
Department of Finance, Stern School of Business
New York University, Salomon Center
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
Tel: 212/998-0710
Fax: 212/995-4220
E-Mail: rengle@stern.nyu.edu
Alex Kane
14850 Fisher Cove
Del Mar, CA 92014
Tel: 619/534-5969
E-Mail: akane@ucsd.edu
AB - We distinguish the measure of risk aversion from the slope coefficient in the linear relationship between the mean excess return on a stock index and its variance. Even when risk aversion is constant, the latter can vary significantly with the relative share of stocks in the risky wealth portfolio, and with the beta of unobserved wealth on stocks. We introduce a statistical model with ARCH disturbances and a time-varying parameter in the mean (TVP ARCH-N). The model decomposes the predictable component in stock returns into two parts: the time-varying price of volatility and the time-varying volatility of returns. The relative share of stocks and the beta of the excluded components of wealth on stocks are instrumented by macroeconomic variables. The ratio of corporate profit over national income and the inflation rate ore found to be important forces in the dynamics of stock price volatility.
ER -