Where’s the Kink? Disappointment Events in Consumption Growth and Equilibrium Asset Prices

Stefanos Delikouras

The Review of Financial Studies, 2017, vol. 30, issue 8, 2851-2889

Abstract: I propose a consumption-based asset pricing model with disappointment aversion to investigate the link between downside consumption risk and expected returns across asset markets. I find that the disappointment model can explain 95% of the cross-sectional variation in size/book-to-market portfolios and more than 80% of the variation in the joint sample of stocks, bonds, and commodity futures. I also show that the performance of the disappointment model is comparable to that of the Fama-French three-factor specification, regardless of the sample frequency (annual, quarterly). Overall, my results indicate that disappointment aversion considerably improves the fit of consumption-based asset pricing models.Received November 27, 2014; editorial decision September 18, 2016 by Editor Stefan Nagel.

JEL-codes: D51 D91 E21 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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