On the Consequences of State Dependent Preferences for the Pricing of Financial Assets
This Paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agent’s coefficient of relative risk aversion to vary with the underlying economy’s growth rate. Existence of equilibrium is proved and its asymptotic properties analysed. This generalization leads to level dependent marginal rates of substitution, a property that sharply distinguishes this model from the standard construct. For very low coefficients of relative risk aversion, the equilibrium risk free and risky security returns are demonstrated to have volatilities and an associated equity premium that substantially exceed what is found in the data. This provides a contrasting perspective on the classic ‘equity premium puzzle.’
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
|Date of creation:||Jan 2003|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
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.:
- 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.
- John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
- Campbell, John & Cochrane, John H., 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
- John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
- Rajnish Mehra & Raaj Sah, 1999.
"Can Small Fluctuations in Investors' Subjective Preferences Induce Large Volatility in Equity Prices?,"
9917, Harris School of Public Policy Studies, University of Chicago.
- Mehra, Rajnish & Sah, Raaj, 2002. "Mood fluctuations, projection bias, and volatility of equity prices," Journal of Economic Dynamics and Control, Elsevier, vol. 26(5), pages 869-887, May.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Angelo Melino & Alan X. Yang, 2003.
"State Dependent Preferences Can Explain the Equity Premium Puzzle,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 806-830, October.
- 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.
- Antoni Bosch-Domènech & Joaquim Silvestre, 1999.
"Does risk aversion or attraction depend on income? An experiment,"
Economics Working Papers
361, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 1999.
- Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
- Philippe Weil, 1989.
"The Equity Premium Puzzle and the Riskfree Rate Puzzle,"
NBER Working Papers
2829, National Bureau of Economic Research, Inc.
- 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.
- Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
- Falato, Antonio, 2009.
"Happiness maintenance and asset prices,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 33(6), pages 1247-1262, June.
- Gordon, Stephen & St-Amour, Pascal, 2003.
"Asset Returns and State-Dependent Risk Preferences,"
Cahiers de recherche
- Gordon S. & St-Amour P., 2004. "Asset Returns and State-Dependent Risk Preferences," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 241-252, July.
- Stephen Gordon & Pascal St-Amour, 2003. "Asset Returns and State-Dependent Risk Preferences," CIRANO Working Papers 2003s-09, CIRANO.
- Jean-Pierre Danthine & John B. Donaldson & Christos Giannikos & Hany Guirguis, 2002.
"On the Consequences of State Dependent Preferences for the Pricing of Financial Assets,"
Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP)
02.17, Université de Lausanne, Faculté des HEC, DEEP.
- Danthine, Jean-Pierre & Donaldson, John B. & Giannikos, Christos & Guirguis, Hany, 2004. "On the consequences of state dependent preferences for the pricing of financial assets," Finance Research Letters, Elsevier, vol. 1(3), pages 143-153, September.
- Danthine, Jean-Pierre & Donaldson, John B & Giannikos, Chrisos & Guirguis, Hany, 2003. "On the Consequences of State Dependent Preferences for the Pricing of Financial Assets," CEPR Discussion Papers 3697, C.E.P.R. Discussion Papers.
- Jean-Pierre Danthine & John B. Donaldson & Christos Giannikos & Hany Guirguis, 2004. "On the Consequences of State Dependent Preferences for the Pricing of Financial Assets," FAME Research Paper Series rp73, International Center for Financial Asset Management and Engineering.
- Constantinides, George M, 1990.
"Habit Formation: A Resolution of the Equity Premium Puzzle,"
Journal of Political Economy,
University of Chicago Press, vol. 98(3), pages 519-543, June.
- G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
- Isen, Alice M. & Geva, Nehemia, 1987. "The influence of positive affect on acceptable level of risk: The person with a large canoe has a large worry," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(2), pages 145-154, April.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
- Nygren, Thomas E. & Isen, Alice M. & Taylor, Pamela J. & Dulin, Jessica, 1996. "The Influence of Positive Affect on the Decision Rule in Risk Situations: Focus on Outcome (and Especially Avoidance of Loss) Rather Than Probability," Organizational Behavior and Human Decision Processes, Elsevier, vol. 66(1), pages 59-72, April.
When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3697. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.