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Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices

Author

Listed:
  • Marco Bonomo
  • René Garcia
  • Nour Meddahi
  • Roméo Tédongap

Abstract

We propose an asset pricing model with generalized disappointment aversion preferences and long-run volatility risk. With Markov switching fundamentals, we derive closed-form solutions for all returns moments and predictability regressions. The model produces first and second moments of price-dividend ratios and asset returns as well as return predictability patterns in line with the data. Compared to Bansal and Yaron (2004), we generate (i) more predictability of excess returns by price-dividend ratios; (ii) less predictability of consumption growth rates by price-dividend ratios. Our results do not depend on a value of the elasticity of intertemporal substitution greater than one. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Marco Bonomo & René Garcia & Nour Meddahi & Roméo Tédongap, 2011. "Generalized Disappointment Aversion, Long-run Volatility Risk, and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 82-122.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:82-122
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    More about this item

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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