Macroeconomic Tail Risks and Asset Prices

The Review of Financial Studies, Vol. 33, No. 8, 2020

57 Pages Posted: 27 Feb 2018 Last revised: 25 Jul 2023

Date Written: April 24, 2019


I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premia inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability while preserving the model's consistency with option moments.

Keywords: macroeconomic tail risk, equity index options, equity premium puzzle, generalized disappointment aversion, risk aversion

JEL Classification: G12, G13

Suggested Citation

Schreindorfer, David, Macroeconomic Tail Risks and Asset Prices (April 24, 2019). The Review of Financial Studies, Vol. 33, No. 8, 2020, Available at SSRN: or

David Schreindorfer (Contact Author)

Arizona State University ( email )

United States


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