Finance Papers

Document Type

Journal Article

Date of this Version

2008

Publication Source

Journal of Business & Economic Statistics

Volume

26

Issue

2

Start Page

131

Last Page

143

DOI

10.1198/073500107000000205

Abstract

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 stocks. The model's conditional moment restrictions are tested on consumption and asset returns data. The empirical estimate of large-scale risk aversion is low, whereas the estimate of loss aversion agrees with prior experimental evidence.

Copyright/Permission Statement

This is an Accepted Manuscript of an article published by Taylor & Francis in the Journal of Business & Economic Statistics, 2008, available online: http://www.tandfonline.com/10.1198/073500107000000205.

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Date Posted: 27 November 2017

This document has been peer reviewed.