Asset Pricing with Return Extrapolation

73 Pages Posted: 1 Oct 2017 Last revised: 28 Feb 2018

See all articles by Lawrence J. Jin

Lawrence J. Jin

California Institute of Technology

Pengfei Sui

California Institute of Technology

Date Written: February 22, 2018


We present a new model of asset prices based on return extrapolation. The model is a Lucas-type general equilibrium framework, in which the agent has Epstein-Zin preferences and extrapolative beliefs. Unlike earlier return extrapolation models, our model allows for a quantitative comparison with the data on asset prices. When the agent's beliefs are calibrated to match survey expectations of investors, the model generates excess volatility and predictability of stock returns, a high equity premium, a low and stable risk-free rate, and a low correlation between stock returns and consumption growth. We compare our model directly to prominent rational models and document their different implications.

Keywords: Expectations, Return Extrapolation, Stock Market Movements

JEL Classification: G02, G12

Suggested Citation

Jin, Lawrence J. and Sui, Pengfei, Asset Pricing with Return Extrapolation (February 22, 2018). Finance Down Under 2018 Building on the Best from the Cellars of Finance Paper. 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

California Institute of Technology ( email )

United States

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