Where's the Kink? Disappointment Events in Consumption Growth and Equilibrium Asset Prices. (14th February 2017)

• Record Type: Journal Article
• Authors: Delikouras, Stefanos
• Is Part Of: Review of financial studies. Volume 30:Number 8(2017:Aug.)
• Page Start: 2851
• Page End: 2889
• Publication Date: 2017-02-14
• Subjects: D51 -- D91 -- E21 -- G12; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhx012
• Languages: English
• ISSNs: 0893-9454

Abstract

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. Received November 27, 2014; editorial decision September 18, 2016 by Editor Stefan Nagel.