Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices
AbstractWe propose an asset pricing model where preferences display generalized disappointment aversion (Routledge and Zin, 2009) and the endowment process involves long-run volatility risk. These preferences, which are embedded in the Epstein and Zin (1989) recursive utility framework, overweight disappointing results as compared to expected utility, and display relatively larger risk aversion for small gambles. With a Markov switching model for the endowment process, 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 and 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. Differently from the Bansal and Yaron model, our results do not depend on a value of the elasticity of intertemporal substitution greater than one.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 636.
Date of creation: Jun 2010
Date of revision:
Publication status: Published in The Review of Financial Studies, vol.�24, n°1, 2011, p.�82-122.
Contact details of provider:
Postal: Manufacture des Tabacs, Aile Jean-Jacques Laffont, 21 Allée de Brienne, 31000 TOULOUSE
Phone: +33 (0)5 61 12 85 89
Fax: + 33 (0)5 61 12 86 37
Web page: http://www.idei.fr/
More information through EDIRC
Other versions of this item:
- Marco Bonomo & René Garcia & Nour Meddahi & Roméo Tédongap, 2011. "Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 82-122.
- 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).
- 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
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Monfort, A. & Pegoraro, F., 2012.
"Asset Pricing with Second-Order Esscher Transforms,"
397, Banque de France.
- Monfort, Alain & Pegoraro, Fulvio, 2012. "Asset pricing with Second-Order Esscher Transforms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1678-1687.
- Alain MONFORT & Fulvio PEGORARO, 2010. "Asset Pricing with Second-Order Esscher Transforms," Working Papers 2010-54, Centre de Recherche en Economie et Statistique.
- Jianjian Jin, 2013. "Jump-Diffusion Long-Run Risks Models, Variance Risk Premium and Volatility Dynamics," Working Papers 13-12, Bank of Canada.
- Andrew Ang & Allan Timmermann, 2011.
"Regime Changes and Financial Markets,"
NBER Working Papers
17182, National Bureau of Economic Research, Inc.
- 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.
- Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, Center for Economic and Financial Research (CEFIR).
- Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.