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This paper studies the relationship between investor risk preferences and asset returns. The paper provides direct evidence on the risk aversion of participants in a securities market. It uses the prices of lottery bonds issued by the Imperial Russian Government in 1864 and 1866 to estimate investor risk aversion and to study changes in preferences toward risk. Time variation in investor risk preferences is then compared to the dynamics of the Russian bond market over the period 1889 to 1904. Increases in risk aversion are positively associated with increases in the price of a risk-free asset. This result is in accord with economic intuition that higher risk aversion is associated with higher demand for a safe asset, and hence, higher equilibrium price of a risk-free security and a lower risk-free rate. Implications of a Consumption CAPM model for a relationship between changes in interest rates and changes of risk aversion are tested. Evidence supporting the model is found. The paper provides evidence on the role of risk aversion in securities market dynamics.


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