Download or read book Time-Varying Risk Aversion and Unexpected Inflation written by Michael W. Brandt and published by . This book was released on 2009 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We formulate a consumption-based asset pricing model in which aggregate risk aversion is time-varying in response to both news about consumption growth (as in a habit formation model) and news about inflation. We estimate our model and explore its pricing implications on the term structure of interest rates and the cross-section of stock returns. Our empirical results support the hypothesis that aggregate risk aversion varies in response to news about inflation. The induced time-variation in risk aversion does not appear to proxy for inflation uncertainty or economic growth.