Research and publications
State Dependence Can Explain the Risk Aversion Puzzle
Risk aversion functions extracted from observed stock and option prices can be negative as shown by Aït-Sahalia and Lo (2000) and Jackwerth (2000). We rationalize this puzzle by a lack of conditioning on latent state variables. Once properly conditioned, risk aversion functions and pricing kernels are consistent with economic theory. A revisited version of this working paper was published in the April 2008 issue of the Review of Financial Studies.
Author(s):
Fousseni Chabi-Yo, René Garcia, Eric Renault
Summary:
Risk aversion functions extracted from observed stock and option prices can be negative as shown by Aït-Sahalia and Lo (2000) and Jackwerth (2000). We rationalize this puzzle by a lack of conditioning on latent state variables. Once properly conditioned, risk aversion functions and pricing kernels are consistent with economic theory. A revisited version of this working paper was published in the April 2008 issue of the Review of Financial Studies.
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Register/Log in| Type : | Working paper |
|---|---|
| Date : | 09/03/2007 |
| Keywords : |
Asset Pricing |
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