Asset Pricing with Regime-Dependent Preferences and Learning

79 Pages Posted: 22 Aug 2013 Last revised: 28 Oct 2013

See all articles by Tony Berrada

Tony Berrada

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Jerome Detemple

Boston University - Department of Finance & Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Marcel Rindisbacher

Questrom School of Business, Boston University; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Multiple version iconThere are 2 versions of this paper

Date Written: August 21, 2013

Abstract

This paper studies equilibrium in a pure exchange economy with unobservable Markov switching consumption growth regimes and regime-dependent preferences. Variations in risk attitudes have fundamental effects on the structure of equilibrium. Explicit solutions are provided for the market price of risk, the interest rate, stock and bond prices, and asset return volatilities. Calibration shows that this one-factor model can simultaneously support empirical long run values of the market price of risk, the interest rate, the stock market volatility, the equity premium and the moments of the consumption growth rate. Dynamic properties of the model are examined. An implied recession index is constructed and its performance evaluated. The ability to explain the dividend strips puzzle, the term structure of interest rates and the predictive behavior of the term premium are studied.

Keywords: Asset pricing puzzles, regime-dependent preferences, incomplete information, equity premium, riskless rate, equity volatility, term structure, bond volatility, dividend strips, implied recession probability, recession detection

JEL Classification: G11

Suggested Citation

Berrada, Tony and Detemple, Jerome and Rindisbacher, Marcel, Asset Pricing with Regime-Dependent Preferences and Learning (August 21, 2013). Swiss Finance Institute Research Paper No. 13-44. Available at SSRN: https://ssrn.com/abstract=2313807 or http://dx.doi.org/10.2139/ssrn.2313807

Tony Berrada (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
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Swiss Finance Institute

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Jerome Detemple

Boston University - Department of Finance & Economics ( email )

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Boston, MA 02215
United States
(617) 353-4297 (Phone)
(617) 353 6667 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO)

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Montreal, Quebec H3C 3J7
Canada

Marcel Rindisbacher

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617 353 4152 (Phone)
617 353 999 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

2020 rue University, 25th Floor
Montreal, Quebec H3C 3J7
Canada

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