Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?

Pok-sang Lam, Stephen Cecchetti and Nelson Mark

American Economic Review, 2000, vol. 90, issue 4, 787-805

Abstract: We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on average, excessive pessimism over expansions; and excessive optimism over contractions (both ending more quickly than the data suggest), our model is able to match the first and second moments of the equity premium and risk-free rate, as well as he persistence and predictability of excess returns found in the data.

JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2000
Note: DOI: 10.1257/aer.90.4.787
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (252)

Downloads: (external link)
http://www.aeaweb.org/articles.php?doi=10.1257/aer.90.4.787 (application/pdf)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good To Be True? (1998)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:90:y:2000:i:4:p:787-805

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().