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- Title
Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices.
- Authors
Bonomo, Marco; Garcia, René; Meddahi, Nour; Tédongap, Roméo
- Abstract
We propose an asset pricing model with generalized disappointment aversion preferences and long-run volatility risk. With Markov switching fundamentals, 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 as well as return predictability patterns in line with the data. Compared to Bansal and Yaron (2004), we generate (i) more predictability of excess returns by price-dividend ratios; (ii) less predictability of consumption growth rates by price-dividend ratios. Our results do not depend on a value of the elasticity of intertemporal substitution greater than one.
- Subjects
MATHEMATICAL models of finance; CAPITAL assets pricing model; MARKOV processes; FINANCIAL performance; RATE of return; RISK-return relationships; RETURN on assets
- Publication
Review of Financial Studies, 2011, Vol 24, Issue 1, p82
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhq116