Asset pricing with distorted beliefs
Subtitle: are equity returns too good to be true? / Stephen G. Cecchetti, Pok-sang Lam, Nelson C. Mark.
Contributors: Lam, Pok-sang.; Mark, Nelson C. 1955-; National Bureau of Economic Research.
Series: NBER working paper series -- working paper 6354; Working paper series (National Bureau of Economic Research) -- working paper no. 6354.
Publisher: National Bureau of Economic Research
Published: 1998
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 23
Subjects: Assets (Accounting) -- Prices -- Forecasting -- United States -- Econometric models.; Rate of return -- United States -- Forecasting -- Econometric models.; Rational expectations (Economic theory) -- United States -- Econometric models.
Description: 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.
Notes: "January 1998."

JEL no. G12.

Includes bibliographical references (p. 22-23).

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