An Exploration of the Effects of Pessimism and Doubt on Asset Returns

Andrew Abel

No 8132, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The subjective distribution of growth rates of aggregate consumption is characterized by pessimism if it is first-order stochastically dominated by the objective distribution. Uniform pessimism is a leftward translation of the objective distribution of the logarithm of the growth rate. The subjective distribution is characterized by doubt if it is mean-preserving spread of the objective distribution. Pessimism and doubt both reduce the riskfree rate and thus can help resolve the riskfree rate puzzle. Uniform pessimism and doubt both increase the average equity premium and thus can help resolve the equity premium puzzle.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2001-02
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Abel, Andrew B., 2002. "An exploration of the effects of pessimism and doubt on asset returns," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1075-1092, July.

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Journal Article: An exploration of the effects of pessimism and doubt on asset returns (2002)
Working Paper: An exploration of the effects of pessimism and doubt on asset returns (2001)
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