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Business Cycles under Generalized Disappointment Aversion

Author

Listed:
  • Claudio Campanale

    () (Economics University of Alicante)

  • Rui Castro
  • Gian Luca Clementi

Abstract

Standard business cycle models with state-additive preferences, while broadly consistent with the behavior of real macroeconomic aggregates, are unable to generate asymmetries between expansions and recessions, and are also inconsistent with the behavior of asset prices. In this paper we exploit the potential of non-additivity in preferences to address these facts. In particular, we use Routledge and Zin's (2004) generalization of Gul's (1991) notion of disappointment aversion. The key feature of Routledge and Zin's preferences is that disappointment occurs away from certainty potentially generating counter-cyclical risk aversion. We introduce disappointment aversion in the standard RBC model and ask whether it is able to simultaneously account for business cycle asymmetries between recessions and expansions and asset pricing facts, while still being consistent with the standard business cycle facts

Suggested Citation

  • Claudio Campanale & Rui Castro & Gian Luca Clementi, 2006. "Business Cycles under Generalized Disappointment Aversion," 2006 Meeting Papers 24, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:24
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    More about this item

    Keywords

    Real Business Cycle; Generalized Disappointment Aversion; Asymmetries; Asset Pricing.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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