659
Views
24
CrossRef citations to date
0
Altmetric
Original Articles

Measuring relative risk aversion

Pages 341-345 | Published online: 02 Feb 2007
 

Abstract

This note intends to estimate the Coefficient of Relative Risk Aversion (CRRA). The underlying model is expected utility and certainty equivalence. The utility function selected is of the power form and is shown to be independent of initial wealth. This property makes the results applicable to any individual, whatever her initial wealth, or even to a market measure. The equity premium that the CRRA must explain is calculated to be 9.5%. The CRRA is calibrated by assuming six different economies from an economy with two states of nature to an economy with seven states of nature, that all describe the same distribution of returns. The calibrated CRRAs are between 4.2 and 5.4. Running 100 replications of samples of 6000 observations of the risky outcome shows that the CRRA that satisfies the constraint on the equity premium is 4.5, a figure which is reasonable and plausible.

Log in via your institution

Log in to Taylor & Francis Online

PDF download + Online access

  • 48 hours access to article PDF & online version
  • Article PDF can be downloaded
  • Article PDF can be printed
USD 53.00 Add to cart

Issue Purchase

  • 30 days online access to complete issue
  • Article PDFs can be downloaded
  • Article PDFs can be printed
USD 205.00 Add to cart

* Local tax will be added as applicable

Related Research

People also read lists articles that other readers of this article have read.

Recommended articles lists articles that we recommend and is powered by our AI driven recommendation engine.

Cited by lists all citing articles based on Crossref citations.
Articles with the Crossref icon will open in a new tab.