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Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices

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  • Marco Bonomo
  • René Garcia
  • Nour Meddahi
  • Roméo Tédongap

Abstract

We 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: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 (2011)
Issue (Month): 1 ()
Pages: 82-122

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Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:82-122

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Cited by:
  1. 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.
  2. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2012. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," NBER Working Papers 18128, National Bureau of Economic Research, Inc.
  3. Andrew Ang & Allan Timmermann, 2012. "Regime Changes and Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 313-337.
  4. Monfort, A. & Pegoraro, F., 2012. "Asset Pricing with Second-Order Esscher Transforms," Working papers 397, Banque de France.
  5. Jianjian Jin, 2013. "Jump-Diffusion Long-Run Risks Models, Variance Risk Premium and Volatility Dynamics," Working Papers 13-12, Bank of Canada.
  6. Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, Center for Economic and Financial Research (CEFIR).
  7. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
  8. Cheng, Ai-Ru & Jahan-Parvar, Mohammad R., 2014. "Risk–return trade-off in the pacific basin equity markets," Emerging Markets Review, Elsevier, vol. 18(C), pages 123-140.
  9. David le Bris & William N. Goetzmann & Sébastien Pouget, 2014. "Testing Asset Pricing Theory on Six Hundred Years of Stock Returns: Prices and Dividends for the Bazacle Company from 1372 to 1946," NBER Working Papers 20199, National Bureau of Economic Research, Inc.

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