Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices
AbstractWe propose an asset pricing model with generalized disappointment aversion preferences and long-run volatility risk. With Markov switching fundamentals, we derive closed-form solutions for all returns moments and predictability regressions. The model produces first and second moments of price-dividend ratios and asset returns as well as return predictability patterns in line with the data. Compared to Bansal and Yaron (2004), we generate (i) more predictability of excess returns by price-dividend ratios; (ii) less predictability of consumption growth rates by price-dividend ratios. Our results do not depend on a value of the elasticity of intertemporal substitution greater than one. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Studies in its journal Review of Financial Studies.
Volume (Year): 24 (2011)
Issue (Month): 1 ()
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Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
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Other versions of this item:
- Bonomo, Marco & Garcia, René & Meddahi, Nour & Tédongap, Roméo, 2010. "Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices," TSE Working Papers 10-187, Toulouse School of Economics (TSE).
- Bonomo, Marco & Garcia, René & Meddahi, Nour & Tédongap, Roméo, 2010. "Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices," IDEI Working Papers 636, Institut d'Économie Industrielle (IDEI), Toulouse.
- G1 - Financial Economics - - General Financial Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
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- Bakshi, Gurdip & Chabi-Yo, Fousseni, 2011. "Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors," Working Paper Series 2011-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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