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Evidence for state and time nonseparable preferences: the case of Finland

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  • Nader Shahzad Virk

Abstract

Preferential modifications to the standard state and time separable power utility are studied for the Finnish equity and bond returns. The reported ambivalence of the high equity premium and low Sharpe ratio makes the Finnish market an important case study. The estimations of the Epstein and Zin (1991) recursive utility and the Campbell and Cochrane (1999) habit formation preferences show that Finnish risk premia are time-varying across samples. Moreover, the results demonstrate that stronger time preferences improve the explanation of asset returns for the modified preferences more so than assuming tighter time preference and higher risk aversion (RA). We conclude that the Campbell--Cochrane-based pricing kernel outperforms the competing models in generating plausible model parameters and suppressing specification errors. The study supports the US evidence relative to the conclusions drawn from the European economies in comparable studies.

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  • Nader Shahzad Virk, 2013. "Evidence for state and time nonseparable preferences: the case of Finland," Applied Financial Economics, Taylor & Francis Journals, vol. 23(24), pages 1821-1838, December.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:24:p:1821-1838
    DOI: 10.1080/09603107.2013.854297
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