Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices

Marco Bonomo, René Garcia, Nour Meddahi and Roméo Tédongap

The Review of Financial Studies, 2011, vol. 24, issue 1, 82-122

Abstract: We propose an asset pricing model with generalized disappointment aversion preferences and long-run volatility risk. With Markov switching fundamentals, we derive closed-form solutions for all returns moments and predictability regressions. The model produces first and second moments of price-dividend ratios and asset returns as well as return predictability patterns in line with the data. Compared to Bansal and Yaron (2004), we generate (i) more predictability of excess returns by price-dividend ratios; (ii) less predictability of consumption growth rates by price-dividend ratios. Our results do not depend on a value of the elasticity of intertemporal substitution greater than one. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2011
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Working Paper: Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices (2010)
Working Paper: Generalized Disappointment Aversion, Long Run Volatility Risk and Asset Prices (2010)
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