Where's the kink? Disappointment events in consumption growth and equilibrium asset prices

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3 Scopus citations

Abstract

I propose a consumption-based asset pricing model with disappointment aversion to investigate the link between downside consumption risk and expected returns across asset markets. I find that the disappointment model can explain 95% of the cross-sectional variation in size/book-to-market portfolios and more than 80% of the variation in the joint sample of stocks, bonds, and commodity futures. I also show that the performance of the disappointment model is comparable to that of the Fama-French three-factor specification, regardless of the sample frequency (annual, quarterly). Overall, my results indicate that disappointment aversion considerably improves the fit of consumption-based asset pricing models.

Original languageEnglish (US)
Pages (from-to)2851-2889
Number of pages39
JournalReview of Financial Studies
Volume30
Issue number8
DOIs
StatePublished - Jan 1 2017

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ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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