Measuring Risk Aversion Across Countries from the Consumption-CAPM: A Spectral Approach

Abstract

Using the Consumption-CAPM, Campbell (2003, Consumption-based asset pricing, Constantinides G, Harris M, Stulz R (eds), Handbook of the economics of finance, Amsterdam, North-Holland) reports cross-country evidence that imply implausibly large coefficients of relative risk aversion, thus confirming the “equity premium puzzle” in an international context. In this paper we adopt a spectral approach to re-estimate the values of risk aversion over the frequency domain. Our findings indicate that at lower frequencies risk aversion falls substantially across countries, thus yielding in many cases reasonable values of the implied coefficient of risk aversion.