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Asset pricing with a forward–backward stochastic differential utility

Authors
Journal
Economics Letters
0165-1765
Publisher
Elsevier
Publication Date
Volume
72
Issue
2
Identifiers
DOI: 10.1016/s0165-1765(01)00432-3
Keywords
  • Disappointment
  • Anticipation
  • Equity Premium
  • Asset Pricing
  • Forward Backward Sdu

Abstract

Abstract In an intertemporal setting we model the anticipation–disappointment effect through a habit formation process which is a function of past consumption and of past expected utility. We show that in equilibrium the anticipation effect reduces the risk premium, whereas the disappointment effect induces a higher risk premium.

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