Generalized Disappointment Aversion and the Variance Term Structure

Babiak, Mykola (2023) Generalized Disappointment Aversion and the Variance Term Structure. Journal of Financial and Quantitative Analysis. pp. 1-25. ISSN 0022-1090

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Abstract

Contrary to leading asset pricing theories, recent empirical evidence indicates that financial markets compensate only short-term equity variance risk. An equilibrium model with generalized disappointment aversion risk preferences and rare events reconciles salient features of the variance term structure. In addition, a calibration explains the variance and skew risk premiums in equity returns and the implied volatility skew of index options while capturing standard moments of fundamentals, equity returns, and the risk-free rate. The key intuition for the results stems from substantial countercyclical risk aversion induced by endogenous variation in the probability of disappointing events in consumption growth.

Item Type:
Journal Article
Journal or Publication Title:
Journal of Financial and Quantitative Analysis
Uncontrolled Keywords:
Research Output Funding/yes_externally_funded
Subjects:
?? generalized disappointment aversionlearningprice of variance riskrare eventsyes - externally fundednofinanceeconomics and econometricsaccountingd81e32e44g12 ??
ID Code:
192041
Deposited By:
Deposited On:
26 Apr 2023 08:55
Refereed?:
Yes
Published?:
Published
Last Modified:
03 Jul 2024 00:12