Measuring relative risk aversion

Azar, Samih Antoine

doi:10.1080/17446540600690151

Cited by 34 publications

(20 citation statements)

References 11 publications

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“…These are the parameters adopted in Azar (2006) for whom one economy, found in Panel F of Table 1, is portrayed to have the following seven equally probable outcomes: 55%, 35%, 15%, 10%, 0%, -5%, -15%. These seven outcomes describe a distribution with mean 13.57% and a standard deviation of 22.73%, quite close to the parameters of Ross et al (2002).…”

Section: Analysis Of the Resultsmentioning

confidence: 99%

“…Fortunately there is a way around this problem, at least in what concerns the ultimate change in the required rate of return. The method adopted is based on Azar (2006). This method consists of depicting a discrete distribution for the risky return, assuming that the certainty equivalent utility is that of the risk-free rate, and factoring out initial wealth.…”

Section: Analysis Of the Resultsmentioning

confidence: 99%

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The CCAPM with Varying Preferences

Azar

2017

IJBM

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The Consumption Capital Asset Pricing Model (CCAPM) is by now a paradigm in financial economics. Applied to the risk-free rate, the CCAPM implies an Euler equation which depends on expected marginal utilities. The paper uses a widespread functional form to specify the utility. However the paper introduces varying preferences into the Euler equation. This enables us to find a relation between the current risk-free rate and the current level of real per capita consumption. Empirically this relation finds that risk aversion is lower for the short run and higher for the long run. The difference between the two is economically small but it is still statistically significant. The paper calculates the differential risk premium required to compensate for the higher long run risk aversion. This premium is also economically small. The paper concludes that the evidence supports that, in the long run, risk is either the same or higher than the short run risk.

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Section: Analysis Of the Resultsmentioning

confidence: 99%

Section: Analysis Of the Resultsmentioning

confidence: 99%

The CCAPM with Varying Preferences

Azar

2017

IJBM

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“…A value of zero represents risk neutrality, while increasingly positive values indicate increasing risk aversion. In surveying the literature, Azar [2006] finds general agreement that the realistic range for risk aversion is between one and five. The majority of studies use a value in this range, and where there is disagreement, it is generally among those who believe that risk aversion is even greater.…”

Section: Methodsmentioning

confidence: 99%

“…This is a standard way to evaluate the utility provided by wealth (see, for instance, Ibbotson, Milevsky, Chen, and Zhu [2007]; Milevsky [2006]; Azar [2006];and Poterba, Rauh, Venti, and Wise [2005]). We calculate the expected utility for each strategy as the mean utility from the 10,000 simulations and then compare the expected utilities from the lifecycle and contrarian strategies.…”

Section: Methodsmentioning

confidence: 99%

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The Portfolio Size Effect and Lifecycle AssetAllocation Funds: A Different Perspective

Pfau¹

2011

JPM

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Basu and Drew (in the JPM Spring 2009 issue) argue that lifecycle asset allocation strategies are counterproductive to the retirement savings goals of typical individual investors. Because of the portfolio size effect, most portfolio growth will occur in the years just before retirement when lifecycle funds have already switched to a more conservative asset allocation. In this article, we use the same methodology as Basu and Drew, but we do not share their conclusion that the portfolio size effect soundly overturns the justification for the lifecycle asset allocation strategy. While strategies that maintain a large allocation to stocks do provide many attractive features, we aim to demonstrate that a case for supporting a lifecycle strategy can still be made with modest assumptions for risk aversion and diminishing utility from wealth. Our differing conclusion results from four factors: (1) we compare the interactions between different strategies; (2) we consider a more realistic example for the lifecycle asset allocation strategy; (3) we examine the results for 17 countries; and (4) we provide an expected utility framework to compare different strategies. We find that with a very reasonable degree of risk aversion, investors have reason to prefer the lifecycle strategy in spite of the portfolio size effect.Journal of Economic Literature Classification Number: D14, D81, G11, G23

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Understanding Risk

Gerunov

2022

Risk Analysis for the Digital Age

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Measuring relative risk aversion

Cited by 34 publications

References 11 publications

The CCAPM with Varying Preferences

The CCAPM with Varying Preferences

The Portfolio Size Effect and Lifecycle AssetAllocation Funds: A Different Perspective

Understanding Risk

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