Implications of Labor Market Frictions for Risk Aversion and Risk Premia

摘要

Traditional studies of risk aversion, such as Arrow (1965), Pratt (1964), Epstein and Zin (1989), and Weil (1989), assume that household labor supply is fixed. However, this assumption ignores households' ability to partially offset portfolio shocks by varying hours of work. As a result, fixed-labor measures of risk aversion are not representative of the household's aversion to holding risky assets when labor supply can vary. For reasonable parameterizations, traditional, fixed-labor measures of risk aversion can overstate the household's aversion to holding a risky asset by a factor of as much as ten, as in Table 3.