Wednesday 15 November 2017, 1.00PM to 2.00pm
Speaker(s): Alexandros Kostakis (Manchester)
Host: Peter Spencer
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 over gains and losses, and question the effectiveness of the smooth utility framework, which is traditionally used in consumption-based asset pricing.
Location: ARRC Auditorium (A/RC014)
Admission: All welcome