Proceedings of 6th International Business and Social Sciences Research Conference
3 – 4 January, 2013, Dubai, UAE, ISBN: 978-1-922069-18-4
State Dependent Preferences & Loss Aversion:
Can they explain the equity premium?
Sara Nada1
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They are the closest in explaining it .
Empirically examining S&P 500 under the basic consumption based model with
a representative agent and a recursive utility function. In a state dependent
preference setting, the mean risk aversion level needed to satisfy the equity
premium level, is not within the acceptable limits but it is much lower than in the
case of preferences independent of the state realized. A modest loss aversion
coefficient is capable of explaining the equity premium level with acceptable
value of relative risk aversion. In both cases, Hansen-Jagannathan bound is
satisfied.
Keywords: state dependent preferences, recursive preferences, loss aversion, equity
premium.
Field of Research: Finance
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University of Rome Tor Vergata. Email: sara_nada14@hotmail.com
Acknowledgement: I feel grateful to each and everyone who supported me whether directly or indirectly,
academically or non academically, whether I knew about it or even not. I would like to thank Rajnish Mehra,
Nicola Borri, Stefano Herzel, Angelo Melino and Larry Epstein. Prof. Angelo Melino… I wished I were able to
thank you personally but maybe I can do so in the near future, who knows!
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