Asset pricing with return extrapolation

Lawrence J. Jin and Pengfei Sui

Journal of Financial Economics, 2022, vol. 145, issue 2, 273-295

Abstract: We present a new model of asset prices in which a representative agent has extrapolative beliefs about stock market returns and Epstein-Zin preferences. The model quantitatively explains facts about asset prices, return expectations, and cash-flow expectations. When the agent’s beliefs about stock market returns are calibrated to survey expectations of investors, the model generates excess volatility and predictability of stock market returns, a high equity premium, a low and stable risk-free rate, and a low correlation between stock market returns and consumption growth. Moreover, the model has implications for expectations about future cash flows that are consistent with empirical findings.

Keywords: Expectations; Extrapolation; Asset prices (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:145:y:2022:i:2:p:273-295

DOI: 10.1016/j.jfineco.2021.10.009

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