Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?
Stephen G. Cecchetti
Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Ohio State University (OSU) - Economics
Nelson C. Mark
University of Notre Dame - Department of Economics and Econometrics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w6354
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."
Number of Pages in PDF File: 26
Date posted: July 16, 2000