Rethinking risk aversion in asset-price models
Many studies in the macroeconomics, finance and traditional finance literatures substantially overstate risk aversion in their models, new research from the San Francisco Federal Reserve posits.
The analysis shows that the traditional measure of risk aversion ignores the household's ability to partially offset shocks to income with changes in hours worked. The research reveals that if risk aversion is not measured correctly then the risk premia on assets in a model are likely to be surprising or
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