Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good To Be True?

Stephen Cecchetti, Pok-sang Lam and Nelson Mark

No 6354, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study a Lucas asset pricing model that is standard in all respects representative agent's subjective beliefs about endowment growth are distorted. Using constant-relative-risk-aversion (CRRA) utility a CRRA coefficient below ten that exhibit, on average, excessive pessimism over expansions and excessive optimism over" contractions, our model is able to match the first and second moments of the equity premium and" risk-free rate, as well as the persistence and predictability of excess returns found in the data."

JEL-codes: G12 (search for similar items in EconPapers)
Date: 1998-01
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Cecchetti, Stephen G., Pok-sang Lam and Nelson C. Mark. "Asset Pricing With Distorted Beliefs: Are Equity Returns To Good To Be True?," American Economic Review, 2000, v90(4,Sep), 787-805.

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