Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good To Be True?

Preprint
Publisher Website
Google Scholar
    • preprint
      • Published in RePEc
Abstract
We study a Lucas asset pricing model that is standard in all respects representative agent's subjective beliefs about endowment growth are distorted. Using constant-relative-risk-aversion (CRRA) utility a CRRA coefficient below ten that exhibit, on average, excessive pessimism over expansions and excessive optimism over" contractions, our model is able to match the first and second moments of the equity premium and" risk-free rate, as well as the persistence and predictability of excess returns found in the data."
All Related Versions

This publication has 0 references indexed in Scilit: