A Single-Factor Consumption-Based Asset Pricing Model

Stefanos Delikouras, Alexandros Kostakis

Research output: Contribution to journalArticle

Abstract

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 one 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 multi-factor 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.

Original languageEnglish (US)
JournalJournal of Financial and Quantitative Analysis
DOIs
StateAccepted/In press - Jan 1 2018

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Asset pricing models
Consumption growth
Certainty equivalent
Consumption-based asset pricing
Factors
Profitability
Expected returns
Disappointment aversion
Asymmetric preferences
Reversal
Multifactor model
Investment portfolio
Standard deviation
Cross section

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

A Single-Factor Consumption-Based Asset Pricing Model. / Delikouras, Stefanos; Kostakis, Alexandros.

In: Journal of Financial and Quantitative Analysis, 01.01.2018.

Research output: Contribution to journalArticle

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