This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Implications of Anticipated Regret and Endogenous Beliefs for Equilibrium Asset Prices: A Theoretical Framework

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Raghu Suryanarayanan () (University of Chicago and CSEF)
Abstract

This paper builds upon Suryanarayanan (2006a) and further investigates the implications of the model of Anticipated Regret and endogenous beliefs based on the Savage (1951) Minmax Regret Criterion for equilibrium asset pricing. A decision maker chooses an action with state contingent consequences but cannot precisely assess the true probability distribution of the state. She distrusts her prior about the true distribution and surrounds it with a set of alternative but plausible probability distributions. The decision maker minimizes the worst expected regret over all plausible probability distributions and alternative actions, where regret is the loss experienced when the decision maker compares an action to a counterfactual feasible alternative for a given realization of the state. We first study the Merton portfolio problem and illustrate the effects of anticipated regret on the sensitivity of portfolio rules to asset returns.We then embed the model in a version of the Lucas (1978) economy. We characterize asset prices with distorted Euler equations and analyze the implications for the volatility puzzles and Euler pricing errors puzzles.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.csef.it/WP/wp162.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy in its series CSEF Working Papers with number 162.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: 01 Sep 2006
Date of revision:
Handle: RePEc:sef:csefwp:162

Contact details of provider:
Postal: 84084 Fisciano (SA)
Phone: 089 - 96 3167
Fax: 089 - 96 3169
Email:
Web page: http://www.csef.it/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Lia Ambrosio).

Related research
Keywords:

Other versions of this item:

This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June. [Downloadable!] (restricted)
    Other versions:
  2. Stephen Gordon & Pascal St-Amour, 2000. "A Preference Regime Model of Bull and Bear Markets," American Economic Review, American Economic Association, vol. 90(4), pages 1019-1033, September. [Downloadable!] (restricted)
    Other versions:
  3. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  4. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
    Other versions:
  5. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April. [Downloadable!] (restricted)
  6. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May. [Downloadable!] (restricted)
  7. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers 485, University of Rochester - Center for Economic Research (RCER). [Downloadable!]
    Other versions:
  8. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Blackwell Publishing, vol. 66(4), pages 873-907, October. [Downloadable!] (restricted)
    Other versions:
  9. David Backus & Bryan Routledge & Stanley Zin, 2004. "Exotic Preferences for Macroeconomists," Working Papers 04-20, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  10. Raghu Suryanarayanan, 2006. "A Model of Anticipated Regret and Endogenous Beliefs," CSEF Working Papers 161, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  11. Lars Peter Hansen & Thomas J. Sargent, 2005. "Certainty equivalence and model uncertainty," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38. [Downloadable!]
  12. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  13. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September. [Downloadable!] (restricted)
    Other versions:
  14. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May. [Downloadable!] (restricted)
  15. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
    Other versions:
  16. Rajnish Mehra & Edward C. Prescott, 2003. "The Equity Premium in Retrospect," NBER Working Papers 9525, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Segal, Uzi & Spivak, Avia, 1990. "First order versus second order risk aversion," Journal of Economic Theory, Elsevier, vol. 51(1), pages 111-125, June. [Downloadable!] (restricted)
    Other versions:
  18. Martin Lettau & Sydney C. Ludvigson, 2005. "Euler Equation Errors," NBER Working Papers 11606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Pascal J. Maenhout, 2004. "Robust Portfolio Rules and Asset Pricing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(4), pages 951-983. [Downloadable!] (restricted)
  20. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
    Other versions:
  21. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
    Other versions:
  22. Robert E. Hall, 1979. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," NBER Reprints 0015, National Bureau of Economic Research, Inc.
    Other versions:
  23. Charles F. Manski, 2004. "Statistical Treatment Rules for Heterogeneous Populations," Econometrica, Econometric Society, vol. 72(4), pages 1221-1246, 07. [Downloadable!] (restricted)
    Other versions:
  24. John H. Cochrane & Lars Peter Hansen, 1993. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  25. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  26. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Recursive robust estimation and control without commitment," Discussion Paper Series 1: Economic Studies 2005,28, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  27. Angelo Melino & Alan X. Yang, 2003. "State Dependent Preferences Can Explain the Equity Premium Puzzle," Working Papers melino-03-01, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
Full references

Statistics
Access and download statistics

Did you know? It is the publishers that input data about their publications, as there is no staff at RePEc.

This page was last updated on 2008-9-2.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.