Asset Pricing with Return Extrapolation

60 Pages Posted: 1 Oct 2017 Last revised: 29 Sep 2019

See all articles by Lawrence J. Jin

Lawrence J. Jin

California Institute of Technology

Pengfei Sui

The Chinese University of Hong Kong, Shenzhen

Date Written: September 28, 2019


We present a new model of asset prices in which the agent has Epstein-Zin preferences and extrapolative beliefs about stock market returns. Unlike earlier return extrapolation models, our model allows for a quantitative comparison with the data on asset prices and expectations. The model generates excess volatility and predictability of stock market returns, a high equity premium, a low and stable risk-free rate, a persistent price-dividend ratio, and a low correlation between stock market returns and consumption growth. Moreover, the agent's expectations about future returns depend positively on recent past returns, consistent with survey evidence on return expectations.

Keywords: Expectations, Return Extrapolation, Stock Market Movements

JEL Classification: G02, G12

Suggested Citation

Jin, Lawrence J. and Sui, Pengfei, Asset Pricing with Return Extrapolation (September 28, 2019). Available at SSRN: or

Lawrence J. Jin (Contact Author)

California Institute of Technology ( email )

1200 E. California Blvd.
MC 228-77
Pasadena, CA 91125
United States
626-395-4558 (Phone)


Pengfei Sui

The Chinese University of Hong Kong, Shenzhen ( email )

2001 Longxiang Road, Longgang District
CUHK (SZ) SR2 - 502
Shenzhen, Guangdong 518172
15810011687 (Phone)

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