Home > Research > Publications & Outputs > Generalized Disappointment Aversion and the Var...

Electronic data


Text available via DOI:

View graph of relations

Generalized Disappointment Aversion and the Variance Term Structure

Research output: Contribution to Journal/MagazineJournal articlepeer-review

E-pub ahead of print
<mark>Journal publication date</mark>27/03/2023
<mark>Journal</mark>Journal of Financial and Quantitative Analysis
Number of pages25
Pages (from-to)1-25
Publication StatusE-pub ahead of print
Early online date27/03/23
<mark>Original language</mark>English


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.