Asset Pricing with Regime-Dependent Preferences and Learning

82 Pages Posted: 4 Oct 2013 Last revised: 15 Aug 2014

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: October 4, 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

Suggested Citation

Berrada, Tony and Detemple, Jerome and Rindisbacher, Marcel, Asset Pricing with Regime-Dependent Preferences and Learning (October 4, 2013). 27th Australasian Finance and Banking Conference 2014 Paper. Available at SSRN: https://ssrn.com/abstract=2336019 or http://dx.doi.org/10.2139/ssrn.2336019

Tony Berrada

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

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Jerome Detemple (Contact Author)

Boston University - Department of Finance & Economics ( email )

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

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th Floor
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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