The stock market premium, production, and relative risk aversion

Higher relative risk aversion (RRA) is associated with higher risk premiums only if the riskiness of output is exogenous. When consumers can affect the variability of output, the market risk premium may well decrease as the RRA increases. With constant relative risk aversion and linear production functions, the ratio of the market risk premium to the standard deviation of the market is constant and independent of the RRA. (JEL D20, D80)