Moody and Dissatisfied: A Possible Resolution of Asset Pricing Puzzles

44 Pages Posted: 14 May 2019 Last revised: 15 Aug 2022

See all articles by Muhammed Yönaç

Muhammed Yönaç

University of Bristol Business School

Date Written: December 1, 2019


Recent microeconomic evidence suggests that risk aversion is largely determined by the changes in the state of the economy and mostly insensitive to the fluctuations in idiosyncratic wealth. I propose a consumption-based asset pricing model that is consistent with this evidence and capable of explaining various stylized facts about the U.S. stock market. In the model, agents have a power-utility type instantaneous utility function whose curvature explicitly depends on a stationary macroeconomic state variable. The model can produce a high equity risk premium with a low, stable and wealth-insensitive relative risk aversion if the utility curvature is mildly countercyclical (i.e., if the agents are mildly "moody") and consumption is sufficiently smaller than a predetermined benchmark (i.e., if the agents are sufficiently "dissatisfied") at the steady state. It also gives a low and stable risk-free rate, procyclical price-dividend ratio, countercylical risk premium and price of risk, return predictability, an upward sloping real yield curve and a downward sloping equity term structure.

Keywords: asset pricing, macro-finance, Lucas model, state-dependent utility, habit formation, equity premium puzzle, risk-free rate puzzle, term structure of equity

JEL Classification: D51, D53, G12, G41

Suggested Citation

Yönaç, Muhammed, Moody and Dissatisfied: A Possible Resolution of Asset Pricing Puzzles (December 1, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-05-04, Available at SSRN: or

Muhammed Yönaç (Contact Author)

University of Bristol Business School ( email )

United States

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