A Single-Factor Consumption-Based Asset Pricing Model

Stefanos Delikouras, Alexandros Kostakis

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We propose a single-factor asset pricing model based on an indicator function
of consumption growth being less than its endogenous certainty equivalent. This certainty equivalent is derived from generalized disappointment aversion preferences, and it is located approximately one standard deviation below the
conditional mean of consumption growth. Our single-factor model can explain the cross-section of expected returns for size, value, reversal, protability, and investment portfolios at least as well as the Fama-French multi-factor models. Our
results show strong empirical support for asymmetric preferences, and question
the effectiveness of the smooth utility framework, which is traditionally used in
consumption-based asset pricing.
Original languageEnglish
Pages (from-to)789-827
Number of pages39
JournalJournal of Financial and Quantitative Analysis
Issue number2
Publication statusPublished - 14 Sept 2018


  • Asset pricing
  • Stock returns
  • consumption
  • disappointment aversion
  • Indicator
  • Certainty equivalent
  • Risk aversion


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