Generalized Disappointment Aversion and Asset Prices

  title={Generalized Disappointment Aversion and Asset Prices},
  author={Bryan R. Routledge and STANLEY E. ZIN},
We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower-tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent’s intertemporal consumption-saving problem that underlies the asset pricing model. The variation in… CONTINUE READING
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