An Exploration of the Effects of Pessimism and Doubt on Asset Returns

Rodney L. White Center for Financial Research Working Paper No. 20-00

31 Pages Posted: 12 Mar 2001

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000

Abstract

The subjective distribution of growth rates of aggregate consumption is characterized by pessimism if it is first-order stochastically dominated by the objective distribution. Uniform pessimism is a leftward translation of the objective distribution of the logarithm of the growth rate. The subjective distribution is characterized by doubt if it is mean-preserving spread of the objective distribution. Pessimism and doubt both reduce the riskfree rate and thus can help resolve the riskfree rate puzzle. Uniform pessimism and doubt both increase the average equity premium and thus can help resolve the equity premium puzzle.

Suggested Citation

Abel, Andrew B., An Exploration of the Effects of Pessimism and Doubt on Asset Returns (December 2000). Rodney L. White Center for Financial Research Working Paper No. 20-00. Available at SSRN: https://ssrn.com/abstract=263045 or http://dx.doi.org/10.2139/ssrn.263045

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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HOME PAGE: http://finance.wharton.upenn.edu/~abel/

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