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The Interaction between Nonexpected Utility and Asymmetric Market Fundamentals
Author(s) -
HUNG MAOWEI
Publication year - 1994
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1994.tb04433.x
Subject(s) - economics , risk premium , bivariate analysis , capital asset pricing model , econometrics , security market line , markov chain , asset (computer security) , matching (statistics) , markov process , equity premium puzzle , financial economics , mathematics , computer science , statistics , stock market , paleontology , computer security , horse , biology
This paper studies a nonexpected utility, general equilibrium asset pricing model in which market fundamentals follow a bivariate Markov switching process. The results show that nonexpected utility is capable of exactly matching the means of the risk‐free rate and the risk premium. Asymmetric market fundamentals are capable of generating a negative sample correlation between the risk‐free rate and the risk premium. Moreover, an equilibrium asset pricing model endowed with asymmetric market fundamentals is consistent with all five first and second moments of the risk‐free rate and the risk premium in the U.S. data.