Business Cycles under Generalized Disappointment Aversion

Claudio Campanale (), Rui Luís de Castro () and Gian Luca Clementi ()

No 24, 2006 Meeting Papers from Society for Economic Dynamics

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

Keywords: Real Business Cycle; Generalized Disappointment Aversion; Asymmetries; Asset Pricing. (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
Date: 2006-12-03

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Persistent link: http://EconPapers.repec.org/RePEc:red:sed006:24

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