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

26 Pages Posted: 16 Jul 2000  

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Pok-sang Lam

Ohio State University (OSU) - Economics

Nelson C. Mark

University of Notre Dame - Department of Economics and Econometrics; National Bureau of Economic Research (NBER)

Date Written: January 1998

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."

Suggested Citation

Cecchetti, Stephen G. and Lam, Pok-sang and Mark, Nelson C., Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True? (January 1998). NBER Working Paper No. w6354. Available at SSRN: https://ssrn.com/abstract=226105

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

415 South Street
Waltham, MA 02453
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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212-720-8629 (Phone)
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Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Pok-sang Lam

Ohio State University (OSU) - Economics ( email )

410 Arps Hall
1945 N. High St.
Columbus, OH 43210-1172
United States

Nelson Chung Mark

University of Notre Dame - Department of Economics and Econometrics ( email )

442 Flanner
Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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