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

Review Review of Financial Studies, January 2011, 24, 82-122

49 Pages Posted: 19 Feb 2009 Last revised: 13 Dec 2013

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

Nour Meddahi

Imperial College Business School

Roméo Tédongap

ESSEC Business School

Date Written: June 2010

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.

Keywords: disappointment aversion, long-run risk, equity premium, asset returns, predictability, equilibrium Asset Pricing, risk-free rate puzzle

JEL Classification: G1, G12, G11, C1, C5

Suggested Citation

Bonomo, Marco and Garcia, René and Meddahi, Nour and Tédongap, Roméo, Generalized Disappointment Aversion, Long-Run Volatility Risk and Asset Prices (June 2010). Review Review of Financial Studies, January 2011, 24, 82-122, Available at SSRN: https://ssrn.com/abstract=1344584 or http://dx.doi.org/10.2139/ssrn.1344584

Marco Bonomo (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

Nour Meddahi

Imperial College Business School ( email )

Exhibition Road
Exhibition Road
London, SW7 2AZ
United Kingdom

Roméo Tédongap

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
+33134439734 (Phone)
+33134439734 (Fax)

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