Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?
- (pp. 787-805)
AbstractWe 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 he persistence and predictability of excess returns found in the data.
CitationCecchetti, Stephen, G., Pok-sang Lam, and Nelson C. Mark. 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?" American Economic Review, 90 (4): 787-805. DOI: 10.1257/aer.90.4.787
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- E44 Financial Markets and the Macroeconomy