Risk aversion in securities markets

This study extends the theoretical analysis and empirical research of risk aversion in securities markets. The analysis of the determinants of the market price of risk, part of an equilibrium model of asset pricing, involves relative risk aversion and is carried out for the continuous time case. Micro relationships which are equilibrium demand functions of individual investors are derived; on the macro level the determinants of the market price of risk are determined. The analysis is carried out first assuming that all assets are marketable; then this assumption is relaxed and non-marketable assets (human-capital) are considered. Finally, we consider explicity the effects of uncertain inflation on risk aversion. The major empirical results are: the assumption of constant relative risk seems to be a reasonable approximation of the market; secondly, the coefficient of relative risk aversion seems to be greater than unity; thirdly, for the first time trends in risk aversion were estimated.