Growth uncertainty, generalized disappointment aversion and production-based asset pricing

Hening Liu and Jianjun Miao

Journal of Monetary Economics, 2015, vol. 69, issue C, 70-89

Abstract: We study a production economy with regime switching in the conditional mean and volatility of productivity growth. The representative agent has generalized disappointment aversion (GDA) preferences. We show that volatility risk in productivity growth carries a positive and sizable risk premium in levered equity. Our model can endogenously generate long-run risks in the volatility of consumption growth observed in the data. We show that introducing leverage with a procyclical dividend process consistent with the data is critical for the GDA preferences to have a large impact on equity returns.

Keywords: Equity premium; Asset pricing; Business cycles; Disappointment aversion; Volatility risk; DSGE model; Markov switching (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:69:y:2015:i:c:p:70-89

DOI: 10.1016/j.jmoneco.2014.12.002

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