Simulating the market coefficient of relative risk aversion

Abstract

In this paper, expected utility, defined by a Taylor series expansion around expected wealth, is maximized. The coefficient of relative risk aversion (CRRA) that is commensurate with a 100% investment in the risky asset is simulated. The following parameters are varied: the riskless return, the market standard deviation, the market stock premium, and the skewness and the kurtosis of the risky return. Both the high extremes and the low extremes are considered. With these figures, the upper bound of the market CRRA is 3.021 and the lower bound is 0.466. Log utility, which corresponds to a CRRA of 1, is not excluded.

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