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Asset pricing with endogenous aspirations

Author

Listed:
  • Fabio Antonelli
  • Emilio Barucci
  • Maria Elvira Mancino

Abstract

We develop the classical asset pricing analysis assuming that the representative agent is characterized by endogenous aspirations. The agent's aspirations at time t are given by a linear combination of the standard of living (habit) at time t (the “forward” part) and of the conditional expectation at t of the habit at the end of the agent's life (the “backward” part). With this process we capture the fact that the agent's preferences are affected by what he plans to do in the future. Under certain conditions, the risk premium turns out to be higher than that obtained with an additive expected utility when both the forward and the backward parts affect the utility negatively. Copyright Springer-Verlag Italia 2001

Suggested Citation

  • Fabio Antonelli & Emilio Barucci & Maria Elvira Mancino, 2001. "Asset pricing with endogenous aspirations," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 24(1), pages 21-39, May.
    • Handle: RePEc:spr:decfin:v:24:y:2001:i:1:p:21-39
    DOI: 10.1007/s102030170007
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    Keywords

    Mathematics Subject Classification (2000): 60H; 90A10; Journal of Economic Literature Classification: C61; D11; D81; G12;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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