A Single-Factor Consumption-Based Asset Pricing Model

97 Pages Posted: 5 Jun 2016 Last revised: 7 Dec 2017

See all articles by Stefanos Delikouras

Stefanos Delikouras

University of Miami - Department of Finance

Alexandros Kostakis

University of Liverpool Management School; University of Manchester - Manchester Business School

Date Written: December 6, 2017

Abstract

We propose a single-factor asset pricing model based on an indicator function of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment aversion preferences, and it is located approximately one standard deviation below the conditional mean of consumption growth. Our single-factor model can explain the cross-section of expected returns for size, value, reversal, profitability, and investment portfolios at least as well as the Fama-French multi-factor models. Our results show strong empirical support for asymmetric preferences, and question the effectiveness of the smooth utility framework, which is traditionally used in consumption-based asset pricing.

Keywords: asset pricing, stock returns, consumption, disappointment aversion, indicator, certainty equivalent, risk aversion

JEL Classification: D51, D91, E21, G12

Suggested Citation

Delikouras, Stefanos and Kostakis, Alexandros, A Single-Factor Consumption-Based Asset Pricing Model (December 6, 2017). Available at SSRN: https://ssrn.com/abstract=2788310 or http://dx.doi.org/10.2139/ssrn.2788310

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Alexandros Kostakis (Contact Author)

University of Liverpool Management School ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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