Time-Varying Preferences and SAD: Evidence from an Asset-Pricing Model∗

We investigate a representative agent consumption-based asset pricing model with two states: low risk aversion and high risk aversion. We explore whether there is a reasonable parameterization capable of generating the empirically observed seasonally-varying equity and Treasury returns documented by Kamstra, Kramer, and Levi (2008). Calibrating the asset-pricing model to observed consumption data, we produce seasonally varying risky and risk-free asset returns that mimic the broad characteristics of market data. Specifically, risky asset returns are high during the seasons when the risk-free returns are low and vice versa, risky asset returns vary seasonally much more than do the risk-free asset returns, and equity premia are much higher in the high risk aversion state than in the low risk aversion state. These findings are produced with small values for the coefficient of relative risk aversion and with small variation in the coefficient of relative risk aversion.