Cointegration, risk aversion and real asset prices

In this letter a vector autoregressive framework is used in order to assess the empirical and economic relevance of the present value model of stock prices with varying discount factors, using data from the New York Stock Exchange over the period 1974-90. The time-series properties of the variables involved are determined by means of formal statistical tests and the relationship between risk aversion and stock price volatility is studied. The model performs poorly for all admissible values of the Arrow-Pratt measure of relative risk aversion.