scholarly journals The equity premium in Brock's asset pricing model

2007 ◽  
Vol 31 (7) ◽  
pp. 2263-2292 ◽  
Author(s):  
Levent Akdeniz ◽  
W. Davis Dechert
Keyword(s):  
Asset Pricing ◽  
Equity Premium ◽  
Pricing Model ◽  
Asset Pricing Model

scholarly journals Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?

2000 ◽  
Vol 90 (4) ◽  
pp. 787-805 ◽  
Author(s):  
Stephen G Cecchetti ◽  
Pok-Sang Lam ◽  
Nelson C Mark
Keyword(s):  
Asset Pricing ◽  
Equity Premium ◽  
Equity Returns ◽  
Relative Risk Aversion ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Subjective Beliefs ◽  
Second Moments ◽  
Risk Free Rate ◽  
Free Rate

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on average, excessive pessimism over expansions; and excessive optimism over contractions (both ending more quickly than the data suggest), our model is able to match the first and second moments of the equity premium and risk-free rate, as well as the persistence and predictability of excess returns found in the data. (JEL E44, G12)

Asset Prices Under Prospect Theory and Habit Formation

2005 ◽  
Vol 08 (01) ◽  
pp. 1-29 ◽  
Author(s):  
Mao-Wei Hung ◽  
Jr-Yan Wang
Keyword(s):  
Asset Pricing ◽  
Prospect Theory ◽  
Reference Point ◽  
Habit Formation ◽  
Equity Premium ◽  
Absolute Amount ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Endogenous Reference ◽  
Premium Puzzle

In this paper, we develop a consumption-based asset pricing model motivated by prospect theory, where habit formation determines the endogenous reference point. This exploits the similarity between habit formation and prospect theory. Both emphasize that the investor does not care about the absolute amount of gain or loss, but rather compares the gain or the loss experienced to a benchmark. The results show that when taking people's loss averse attitude over consumption into consideration, our model is capable of resolving the equity premium puzzle.

Asset pricing with flexible beliefs

2015 ◽  
Vol 19 (4) ◽  
Author(s):  
Christos Axioglou ◽  
Spyros Skouras
Keyword(s):  
Asset Pricing ◽  
Rational Expectations ◽  
Equity Premium ◽  
Pricing Model ◽  
Present Value ◽  
Asset Pricing Model ◽  
Excess Volatility ◽  
Full Rationality ◽  
Predictability Of Returns ◽  
Statistical Criteria

AbstractWe develop a present-value asset pricing model with an econometrically useful representation that accommodates a plethora of stylized assumptions about beliefs. Using 20th century S&P500 data we use our model to compare the empirical fit of belief assumptions associated with rational expectations, asymmetic information, learning, behavioral effects and evolution. Among these, asymmetric information with evolution is particularly useful both in terms of statistical criteria and in terms of ability to explain the equity premium, excess volatility and predictability of returns. Our work suggests that popular relaxations of rationality can easily lead to econometric representations that may be impossible to work with in empirical research. Furthermore, replication of stylized facts may be too weak a requirement when evaluating such models. Fortunately, there exist simple relaxations of rationality that are sufficient to drastically improve the empirical fit of models with full rationality.

ARBITRAGEUR BEHAVIOR IN SENTIMENT-DRIVEN ASSET-PRICING

2021 ◽  
Author(s):  
ERDEM KILIC ◽  
OGUZHAN GÖKSEL
Keyword(s):  
Asset Pricing ◽  
Predictive Power ◽  
Equity Premium ◽  
Equity Markets ◽  
Future Price ◽  
Capital Asset Pricing ◽  
Pricing Model ◽  
Capital Asset ◽  
Asset Pricing Model ◽  
The Impact

This study aims to model arbitrageur behavior in a sentiment-driven capital asset-pricing model under the premise of reflecting a more detailed decomposition of investor types in the equity markets. We explore the behavior and the impact of arbitrageur behavior, particularly, on pricing and on key financial ratios. We observe that the prevalence of the arbitrageur counteracts the effects of unsophisticated investors, resulting in a lower volatility of the price–dividend ratio, lower predictive power of changes in consumption for future price changes and lower equity premium. Thus, the results of our research allow us to conjecture that the extrapolation bias in the prices is lowered.

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