Estimation of Behavior Parameters Based on Recursive Utility in Asset Pricing Theory

In asset pricing theory, recursive utility function contains three behavior parameters: subjective discount factor, coefficient of relative risk aversion and intertemporal elasticity of substitution. In common parlance, recursive utility permits the disentangling of the two psychologically separate concepts of risk aversion and elasticity of intertemporal substitution, which for the traditional time-additive utility functions are constrained to be equal to the inverse of each other. This paper estimates the three behavior parameters of investors in Shanghai stock market and Shenzhen stock market respectively through the general method of moment (GMM). The results show that the signs of the coefficient of relative risk aversion and of the intertemporal elasticity of substitution are different, which means that investors have different attitudes to the risk across states of nature and the risk over time in China