A Single-Factor Consumption-Based Asset Pricing Model

Delikouras, S and Kostakis, A
(2018) A Single-Factor Consumption-Based Asset Pricing Model. Journal of Financial and Quantitative Analysis.

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© 2018 Materials Research Society. 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.

Item Type: Article
Depositing User: Symplectic Admin
Date Deposited: 08 Oct 2018 10:47
Last Modified: 23 Jan 2019 12:52
DOI: 10.1017/S0022109018000819
URI: http://livrepository.liverpool.ac.uk/id/eprint/3027120
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