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Estimating asset pricing models with frictions

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  • Crotty, Kevin
  • Teguia, Alberto

Abstract

We jointly quantify the magnitude of risk aversion and transactions costs implied by asset pricing models with trading frictions. With constant relative risk aversion and symmetric transactions costs, estimated transactions costs on Treasury bills are implausibly high, a manifestation of the risk-free rate puzzle. Introducing short-selling costs for Treasury bills offers a resolution of the puzzle. The resulting confidence sets show upper bounds on risk aversion to be at reasonable levels. Short-selling costs for Treasuries are not necessary under recursive preferences.

Suggested Citation

  • Crotty, Kevin & Teguia, Alberto, 2017. "Estimating asset pricing models with frictions," Economics Letters, Elsevier, vol. 154(C), pages 24-27.
    • Handle: RePEc:eee:ecolet:v:154:y:2017:i:c:p:24-27
    DOI: 10.1016/j.econlet.2017.02.016
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    References listed on IDEAS

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    Cited by:

    1. Zhao, Yang & Yao, Yuan & Wang, Mingtao, 2024. "Risk-free rate puzzle: An explanation of the heterogeneity of consumer risk attitudes under China's income gap," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 940-960.

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    More about this item

    Keywords

    Consumption-based asset pricing; Moment inequalities; Risk aversion; Transactions costs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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