Risk aversion sensitive real business cycles

Zhanhui Chen, Ilan Cooper, Paul Ehling, Costas Xiouros

Research output: Contribution to journalArticlepeer-review


Technology choice allows for substitution of production across states of nature and depends on state-dependent risk aversion. In equilibrium, endogenous technology choice can counter a persistent negative productivity shock with an increase in investment. An increase in risk aversion intensifies transformation across states, which directly leads to higher investment volatility. In our model and the data, the conditional volatility of investment correlates negatively with the price-dividend ratio and predicts excess stock market returns. In addition, the same mechanism generates predictability of consumption growth and produces fluctuations in the risk-free rate.

Original languageEnglish
Pages (from-to)2483-2499
Number of pages17
JournalManagement Science
Issue number4
StatePublished - Apr 2021
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2020 INFORMS


  • Conditional volatility of investment
  • Predictability of returns
  • State-contingent technology
  • Time-varying risk aversion

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


Dive into the research topics of 'Risk aversion sensitive real business cycles'. Together they form a unique fingerprint.

Cite this