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Asset pricing under quantile utility maximization
Author(s) -
Giovannetti Bruno C.
Publication year - 2013
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2013.05.008
Subject(s) - elasticity of intertemporal substitution , economics , downside risk , capital asset pricing model , stock (firearms) , utility maximization , risk aversion (psychology) , consumption (sociology) , maximization , expected utility hypothesis , econometrics , stochastic discount factor , microeconomics , actuarial science , financial economics , growth model , mathematical economics , portfolio , mechanical engineering , social science , sociology , engineering
“Focus on the downside, and the upside will take care of itself” is a famous quote among professional investors. By considering an agent who follows this advice, we reproduce the first and second moments of stock returns, risk‐free rate and consumption growth. The agent's behavior toward risk is analogous to a relative risk aversion of about 3 under expected utility, the elasticity of intertemporal substitution is about 0.5 and the time discount factor is below 1. In particular, the proposed model separates time and risk preferences in an innovative way.