Evidence on the magnitude of risk aversion is essential in understanding the behavior of asset prices. Both the equity premium puzzle and the credit spread puzzle address the problem of a reasonable size of agents’ risk aversion. The estimation of risk aversion is, however, impeded by the fact that observed prices depend on risk preferences and probability beliefs. The market for German redemption lottery bonds (Tilgungsanleihen) constitutes an exceptionally clean environment to study investors’ risk preferences independent of subjective probability beliefs as the probabilities of price changes caused by redemption lotteries are objectively known. The focus of this thesis is to analyze the systematic redemption risk of lottery bonds. Our contribution to the literature is twofold. On the theoretical side, we develop a fully specified dynamic equilibrium model to price redemption lottery bonds. On the empirical side, we employ the valuation model to estimate implied risk aversion coefficients from transaction prices of German lottery bonds. Our most important findings are threefold: estimated relative risk aversion coefficients are significantly positive, of moderate magnitude, and time dependent
