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Asset pricing with utility from external anticipation

Author

Listed:
  • Vincenzo Merella
  • Stephen E. Satchell

Abstract

We show that augmenting household's preferences with utility from anticipation of external factors significantly improves the performance of the consumption-based asset pricing model. Specifically, our predictions match the realized returns on equity and on risk-free assets, and helps in explaining the observed equity premium volatility. This is due to the novel forward-looking component of preferences exerting an effect on households' decision that countervails the standard market incentives to invest. Our findings stem from simulating the model with different data frequencies and confidence indicators as proxies for external anticipation. The model rationalizes the conventional wisdom that confidence makes households feel richer, hence willing to consume more. Our results also suggest that the observed predictive power of confidence on consumption growth might be justified by anticipatory utility.

Suggested Citation

  • Vincenzo Merella & Stephen E. Satchell, 2019. "Asset pricing with utility from external anticipation," Carlo Alberto Notebooks 589, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:589
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset Pricing; Utility from Anticipation; Equity Premium Puzzle.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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