The Interaction between Nonexpected Utility and Asymmetric Market Fundamentals

Mao-Wei Hung

Journal of Finance, 1994, vol. 49, issue 1, 325-43

Abstract: This paper studies a nonexpected utility, general equilibrium asset pricing model in which market fundamentals follow a bivariate Markov switching process. The results show that nonexpected utility is capable of exactly matching the means of the risk-free rate and the risk premium. Asymmetric market fundamentals are capable of generating a negative sample correlation between the risk-free rate and the risk premium. Moreover, an equilibrium asset pricing model endowed with asymmetric market fundamentals is consistent with all five first and second moments of the risk-free rate and the risk premium in the U.S. data. Copyright 1994 by American Finance Association.

Date: 1994
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