This paper develops a consumption-based asset pricing model in which attitudes towards risk are contingent upon the state of the world. For a low high level of consumption relative to a subjective metric, counter-cyclical pro-cyclical risk aversion implies that consumption shocks generate larger uctuations in marginal utility, against which the agent will hedge in choosing his optimal portfolio. Asset prices are studied using two-state Markov preference regimes where bull and bear markets re ect alternating periods of low and high risk aversion. Joint estimation of bond and stock prices highlights moderate and infrequent m o v ements in risk aversion, and a marked improvement on the model's ability to capture the cyclical nature of observed asset prices.

This note concerns a class of matrix Riccati equations associated with stochastic linear-quadratic optimal control problems with indefinite state and control weighting costs. A novel sufficient condition of solvability of such equations is derived, based on a monotonicity property of a newly defined set. Such a set is used to describe a family of solvable equations.

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Information asymmetry is a necessary prerequisite for testing adverse selection. This paper applies this sequence of tests to Mauritian slave auctions. The theory of dynamic auctions with private and common values suggests that when an informed participant is known to be active, uninformed bidders will be more aggressive and the selling price will be higher. We conjecture that observable family links between buyer and seller entailed superior information and find a strong price premium when a related buyer purchased a slave, indicative of information asymmetry. We then test for adverse selection using sale motivation. Our results indicate large discounts on voluntary as compared to involuntary sales. Consistent with adverse selection, the market anticipated that predominantly low-productivity slaves would be brought to the market in voluntary sales. JEL Classification: D 82, N 37