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TIME VARIABILITY IN MARKET RISK AVERSION
Author(s) -
Berger Dave,
Turtle H. J.
Publication year - 2009
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2009.01251.x
Subject(s) - risk aversion (psychology) , economics , econometrics , consumption smoothing , consumption (sociology) , smoothing , statistics , expected utility hypothesis , financial economics , mathematics , business cycle , social science , sociology , keynesian economics
We adopt realized covariances to estimate the coefficient of risk aversion across portfolios and through time. Our approach yields second moments that are free from measurement error and not influenced by a specified model for expected returns. Supporting the permanent income hypothesis, we find risk aversion responds to consumption‐smoothing behavior. As income increases, or as the consumption‐to‐income ratio falls, relative risk aversion decreases. We also document variation in risk aversion across portfolios: risk aversion is highest for small and value portfolios.