A Single-Factor Consumption-Based Asset Pricing Model

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Abstract

We propose a single-factor asset pricing model based on an indicator function
of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment aversion preferences, and it is located approximately one standard deviation below the
conditional mean of consumption growth. Our single-factor model can explain the cross-section of expected returns for size, value, reversal, protability, and investment portfolios at least as well as the Fama-French multi-factor models. Our
results show strong empirical support for asymmetric preferences, and question
the effectiveness of the smooth utility framework, which is traditionally used in
consumption-based asset pricing.

Bibliographical metadata

Original languageEnglish
JournalJournal of Financial and Quantitative Analysis
Early online date14 Sep 2018
DOIs
Publication statusPublished - 2018

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