This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stoc...

This paper attempts to provide a survey of asset-pricing models based on the principle of maximization of expected utility. I will begin my analysis by setting out a simplified, discrete-time version of the model that was developed independently by Lucas (1978) and Breeden (1979). Since those studies appeared, intertemporal general-equilibrium models have come to occupy an increasingly importan...

If the underlying asset price process is unknown, arbitrageurs may not have sufficient incentive and confidence to use the underlying asset to arbitrage options. The option market makers can hedge their portfolios of temporary option inventories without the underlying asset, but investors’ risk attitudes and heterogeneous expectations could become relevant to option pricing. This paper shows th...

This paper presents a dynamic asset-pricing model under asymmetric information. Investors have different information concerning the future growth rate of dividends. They rationally extract information from prices as well as dividends and maximize their expected utility. The model has a closed-form solution to the rational expectations equilibrium. We find that existence of uninformed investors ...

Investors in equilibrium are modeled as facing investor speci ̄c risks across the space of assets. Personalized asset pricing models re°ect these risks. Averaging across the pool of investors we obtain a market asset pricing model that re°ects market risk exposures. It is observed on invoking a law of large numbers applied to an in ̄nite population of investors that many personally relevant risk ...

capital asset pricing model (capm) has been among the common models to estimate expected returns rate. since the linearity assumption is considered in the standard version of the capital asset pricing model, estimating beta in nonlinear setting will be inconsistent and bias-oriented. therefore, this study tries to evaluate predictive power of nonlinear capital asset pricing model as well as sta...

During recession, many macroeconomic variables display higher levels of volatility. We show how introducing an AR(1)-ARCH(1) driving process into the canonical Lucas consumption CAPM framework can account for the empirically observed greater volatilty of asset returns during recessions. In particular, agents' joint forecasting of levels and time-varying second moments transforms symmetric-volat...

The equity premium puzzle shows that using standard parameters and setup, the Consumption-based Capital Asset Pricing Model’s (CCAPM’s) prediction of the premium associated with systematic risk is out by an order of magnitude. The object of this paper is to consider the implications of each of the broad classes of explanations of the equity premium puzzle for resource allocation, welfare and po...