A Model of Return Volatility with Application to Estimating Relative Risk Aversion

We estimate a monthly return volatility model that allows for the abrupt changes in volatility often observed in returns data. Using this model we are able to identify key months likely to correspond to draws from a high volatility regime. Using our model in conjunction with Merton's (1980) model relating expected risk premia to risk we obtain reasonable estimates of the coefficient of relative risk aversion.