On A Simple Econometric Approach for Utility-Based Asset Pricing Model

The Journal of Finance has published an important paper entitled “A Simple Econometric Approach for Utility-Based Asset Pricing Model” by Brown and Gibbon (1985). The main purpose of this paper is to extend the research of Brown and Gibbons (1985) and Karson et al. (1995) in estimating the relative risk aversion (RRA) parameter β in utility-based asset pricing model. First, we review the distributions of RRA parameter estimate β̂ . Then, a new method to the distribution of β̂ is derived, and a Bayesian approach for the inference of β is proposed. Finally, empirical results are presented by using market rate of return and riskless rate data during the period December 1925 through December 1999. * Corresponding author: Professor Cheng-Few Lee, Department of Finance, School of Business, Rutgers University, Piscataway, NJ 08854-8054, U.S.A. Phone: (732) 445-3530; Fax: (732) 445-5927; E-mail: [email protected] February 2002 version