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Asset Pricing with Regime-Dependent Preferences and Learning

Author

Listed:
  • Tony Berrada

    (University of Geneva, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute)

  • Jerome Detemple

    (Boston University, Center for Interuniversity Research and Analysis on Organization (CIRANO))

  • Marcel Rindisbacher

    (Boston University and Center for Interuniversity Research and Analysis on Organization (CIRANO))

Abstract

This paper studies equilibrium in a pure exchange economy with unobservable Markov switching consumption growth regimes and regime-dependent preferences. Variations in risk attitudes have fundamental effects on the structure of equilibrium. Explicit solutions are provided for the market price of risk, the interest rate, stock and bond prices, and asset return volatilities. Calibration shows that this one-factor model can simultaneously support empirical long run values of the market price of risk, the interest rate, the stock market volatility, the equity premium and the moments of the consumption growth rate. Dynamic properties of the model are examined. An implied recession index is constructed and its performance evaluated. The ability to explain the dividend strips puzzle, the term structure of interest rates and the predictive behavior of the term premium are studied.

Suggested Citation

  • Tony Berrada & Jerome Detemple & Marcel Rindisbacher, 2013. "Asset Pricing with Regime-Dependent Preferences and Learning," Swiss Finance Institute Research Paper Series 13-44, Swiss Finance Institute, revised Oct 2013.
    • Handle: RePEc:chf:rpseri:rp1344
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    File URL: http://ssrn.com/abstract=2313807
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    Citations

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    Cited by:

    1. Hasler, Michael & Marfè, Roberto, 2016. "Disaster recovery and the term structure of dividend strips," Journal of Financial Economics, Elsevier, vol. 122(1), pages 116-134.
    2. Roberto Marfè, 2016. "Corporate Fraction and the Equilibrium Term Structure of Equity Risk," Review of Finance, European Finance Association, vol. 20(2), pages 855-905.
    3. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    4. Takamizawa, Hideyuki, 2022. "An equilibrium model of the term structures of bonds and equities," International Review of Financial Analysis, Elsevier, vol. 84(C).
    5. van Binsbergen, Jules H. & Koijen, Ralph S.J., 2017. "The term structure of returns: Facts and theory," Journal of Financial Economics, Elsevier, vol. 124(1), pages 1-21.

    More about this item

    Keywords

    Asset pricing puzzles; regime-dependent preferences; incomplete information; equity premium; riskless rate; equity volatility; term structure; bond volatility; dividend strips; implied recession probability; recession detection;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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