An exploration of the effects of pessimism and doubt on asset returns

No 01-1, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The subjective distribution of growth rates of aggregate consumption is characterized by pessimism if it is first-order stochastically dominated by the objective distribution. Uniform pessimism is a leftward translation of the objective distribution of the logarithm of the growth rate. The subjective distribution is characterized by doubt if it is mean-preserving spread of the objective distribution. Pessimism and doubt both reduce the riskfree rate and thus can help resolve the riskfree rate puzzle. Uniform pessimism and doubt both increase the average equity premium and thus can help resolve the equity premium puzzle.

Keywords: Asset pricing; Rational expectations (Economic theory) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2001
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Related works:
Working Paper: An Exploration of the Effects of Pessimism and Doubt on Asset Returns (2001)
Journal Article: An exploration of the effects of pessimism and doubt on asset returns (2002)
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