On Sources of Risk Premia in Representative Agent Models

31 Pages Posted: 13 Sep 2019 Last revised: 15 Sep 2019

See all articles by Tyler Beason

Tyler Beason

Arizona State University (ASU) - Finance Department

David Schreindorfer

Arizona State University

Date Written: September 12, 2019

Abstract

We use options data and realized returns to decompose unconditional risk premia into different parts of the return state space. Our decomposition shows that states associated with stock market crashes account for most of the equity premium in the data, but for nearly none of it in leading asset pricing theories based on habits, long run risks, and rare disasters. Calibrations with alternative shock specifications suggest that standard risk preferences make it challenging to account for sources of risk premia in a full information representative agent setting. A model with Generalized Disappointment Aversion preferences fits the data well.

Keywords: equity premium decomposition, model diagnostic, return state space, equity index options, generalized disappointment aversion

JEL Classification: G12, G13

Suggested Citation

Beason, Tyler and Schreindorfer, David, On Sources of Risk Premia in Representative Agent Models (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3452743 or http://dx.doi.org/10.2139/ssrn.3452743

Tyler Beason

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

David Schreindorfer (Contact Author)

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States
4809656212 (Phone)

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

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