Where’s the Kink? Disappointment Events in Consumption Growth and Equilibrium Asset Prices
I propose a consumption-based asset pricing model with disappointment aversion to investigate the link between downside consumption risk and expected returns across asset markets. I find that the disappointment model can explain 95% of the cross-sectional variation in size/book-to-market portfolios and more than 80% of the variation in the joint sample of stocks, bonds, and commodity futures. I also show that the performance of the disappointment model is comparable to that of the Fama-French three-factor specification, regardless of the sample frequency (annual, quarterly). Overall, my results indicate that disappointment aversion considerably improves the fit of consumption-based asset pricing models.Received November 27, 2014; editorial decision September 18, 2016 by Editor Stefan Nagel.
- DOI
- 10.1093/rfs/hhx012
- Volume
- 30 (8)
- Pages
- 2851-2889
- Language
- en
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- BibTeX
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- openalex crossref