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A Single-Factor Consumption-Based Asset Pricing Model

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  • Delikouras, Stefanos
  • Kostakis, Alexandros

Abstract

We propose a single-factor asset pricing model based on an indicator function of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment-aversion preferences, and it is located approximately 1 standard deviation below the conditional mean of consumption growth. Our single-factor model can explain the cross section of expected returns for size, value, reversal, profitability, and investment portfolios at least as well as the Fama–French multifactor models. Our results show strong empirical support for asymmetric preferences and question the effectiveness of the smooth utility framework, which is traditionally used in consumption-based asset pricing.

Suggested Citation

  • Delikouras, Stefanos & Kostakis, Alexandros, 2019. "A Single-Factor Consumption-Based Asset Pricing Model," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 789-827, April.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:02:p:789-827_00
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    Cited by:

    1. Song, Pengcheng & Ma, Xinxin & Zhang, Xuan & Zhao, Qin, 2021. "The influence of the SARS pandemic on asset prices," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    2. Dittmar, Robert F. & Schlag, Christian & Thimme, Julian, 2023. "Non-substitutable consumption growth risk," SAFE Working Paper Series 408, Leibniz Institute for Financial Research SAFE.
    3. Laurinaityte, Nora & Meinerding, Christoph & Schlag, Christian & Thimme, Julian, 2024. "GMM weighting matrices in cross-sectional asset pricing tests," Journal of Banking & Finance, Elsevier, vol. 162(C).
    4. Borup, Daniel & Schütte, Erik Christian Montes, 2022. "Asset pricing with data revisions," Journal of Financial Markets, Elsevier, vol. 59(PB).
    5. Ashley Lim & Yihui Lan & Sirimon Treepongkaruna, 2020. "Asset pricing and energy consumption risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3813-3850, December.

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