Abstract
This paper presents a simple rational expectations model of in-
tertemporal asset pricing. It shows that heterogeneous risk aversion
of investors is likely to generate declining aggregate relative risk aver-
sion. This leads to predictability of asset returns and high and persis-
tent volatility. Stock market crashes may be observed if relative risk
aversion differs strongly across investors. Then aggregate relative risk
aversion may sharply increase given a small impairment in fundamen-
tals so that asset prices may strongly decline. Changes in aggregate
relative risk aversion may also lead to resistance and support levels as
used in technical analysis. For numerical illustration we propose an
analytical asset price formula.
JEL classification: G12
Keywords: Aggregate relative risk aversion, Equilibrium asset price
processes, Excess Volatility, Return predictability, Stock market crashes
More intriguing information
1. TINKERING WITH VALUATION ESTIMATES: IS THERE A FUTURE FOR WILLINGNESS TO ACCEPT MEASURES?2. PROJECTED COSTS FOR SELECTED LOUISIANA VEGETABLE CROPS - 1997 SEASON
3. Multifunctionality of Agriculture: An Inquiry Into the Complementarity Between Landscape Preservation and Food Security
4. Does Market Concentration Promote or Reduce New Product Introductions? Evidence from US Food Industry
5. Types of Tax Concessions for Promoting Investment in Free Economic and Trade Areas
6. The name is absent
7. Equity Markets and Economic Development: What Do We Know
8. The name is absent
9. Managing Human Resources in Higher Education: The Implications of a Diversifying Workforce
10. Cultural Neuroeconomics of Intertemporal Choice