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• W3124996072 abstract "In this paper, we match both the first and the second moments of the equity premium and the risk-free rate by endowing the agents in the economy with disappointment aversion preferences and by making the joint process of consumption and dividends follow a Hamilton's (1989) Markov switching model. The interesting feature about the model proposed in this paper is that we need both disappointment aversion and a Markov switching endowment to match the first and second moments of both real and excess returns. With disappointment averse agents but a joint random walk for consumption and dividend growth rates, the average equity premium produced by the model is in the order of 2.5% compared with 5.3% in our sample. With isoelastic preferences but a bivariate three-state Markov switching model for consumption and dividend growth rates, the equity premium is 1.7% for a coefficient of relative risk aversion of 8 and a discount factor of 0.98, while the standard deviations for both the equity premium and the risk-free rate are close to the observed ones. The mean of the risk-free rate stands however very high at 13%. For a disappointment averse consumer, who weights more bad outcomes than good ones (where bad and good are defined with reference to a certainty equivalent measure of a gamble), it is precisely the existence of a bad state that lowers the equilibrium risk-free rate and increases the mean stock return, thereby producing the desired equity premium. Dans le present article, nous reproduisons les premier et deuxieme moments de la prime de risque sur les actions et du taux de risque en dotant les agents dans notre economie de preferences exhibant de l'averison pour la deception et en adoptant un modele a changements de regime markoviens (Hamilton (1989)) pour le processus conjoint de la consommation et des dividendes. Le modele propose a la particularite interessante de devoir combiner l'aversion pour la deception et une dotation a changements de regime markoviens pour pouvoir reproduire les premier et deuxieme moments des rendements reels et excedentaires. Avec des agents dotes d'averison pour la deception0501s une promenade aleatoire conjointe pour les taux de croissance de la consommation et des dividendes, la prime de risque moyenne sur les actions produites par le modele est de l'ordre de 2,5 % par rapport a 5,3 % dans notre echantillon. Avec des preferences isoelastiques0501s un modele bivarie a changement de regime markovien a 3 etats pour les taux de croissance de la consommation et des dividendes, la prime de risque sur les actions est de 1,7 % pour un coefficient d'aversion relative pour le risque de 8 et un facteur d'escompte de 0,98, tandis que les ecarts-types de la prime de risque et du taux sans risque sont proches des valeurs observees. La moyenne du taux sans risque est toutefois tres elevee a 13 %. Pour un consommateur ayant de l'aversion pour la deception, qui accorde un poids plus important aux mauvaises realisations de la nature qu'aux bonnes (ou bon et mauvais se definissent par un rapport a une mesure d'equivalence certaine d'un enjeu), c'est precisement l'existence d'un mauvais etat de la nature qui, a l'equilibre, fait baisser le taux sans risque et augmenter le rendement moyen sur les actions, ce qui produit la prime de risque desiree sur les actions." @default.
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• W3124996072 title "Disappointment Aversion as a Solution to the Equity Premium and the Risk-Free Rate Puzzles" @default.
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