scholarly journals Disastrous Disappointments: Asset-Pricing with Disaster Risk and Disappointment Aversion

2013 ◽  
Vol 2013 (1309) ◽  
Author(s):  
Jim Dolmas ◽  
Keyword(s):  
Asset Pricing ◽  
Disaster Risk ◽  
Disappointment Aversion

scholarly journals A Single-Factor Consumption-Based Asset Pricing Model

2018 ◽  
Vol 54 (2) ◽  
pp. 789-827 ◽  
Author(s):  
Stefanos Delikouras ◽  
Alexandros Kostakis
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Empirical Support ◽  
Certainty Equivalent ◽  
Pricing Model ◽  
Single Factor ◽  
Consumption Growth ◽  
Multifactor Models ◽  
Asset Pricing Model ◽  
Disappointment Aversion

We propose a single-factor asset pricing model based on an indicator function of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment-aversion preferences, and it is located approximately 1 standard deviation below the conditional mean of consumption growth. Our single-factor model can explain the cross section of expected returns for size, value, reversal, profitability, and investment portfolios at least as well as the Fama–French multifactor models. Our results show strong empirical support for asymmetric preferences and question the effectiveness of the smooth utility framework, which is traditionally used in consumption-based asset pricing.

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