Review of Financial Studies Vol. 24 No. 1 2011
Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices
Abstract
We propose an asset pricing model where preferences display generalized disappointment aversion 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 Differently from the Bansal and Yaron model, our results do not depend on a value of the elasticity of intertemporal substitution greater than one.
- DOI
- 10.1093/rfs/hhq116
- Volume
- 24
- Issue
- 1
- Pages
- 82-122
- Language
- en
- Sources
- openalex crossref