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A Single-Factor Consumption-Based Asset Pricing Model

  • Stefanos Delikouras and Alexandros Kostakis

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 1 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, profitability, and investment portfolios at least as well as the Fama–French multifactor 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.

Corresponding author
*Delikouras (corresponding author),, University of Miami School of Business Administration; Kostakis,, University of Manchester Business School.
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We thank Hendrik Bessembinder (the editor) and Lars-Alexander Kuehn (the referee). An earlier version of the article was circulated under the title “One-Factor Asset Pricing.” This article has benefited from the comments of Massimiliano Affinito, Daniele Bianchi, Michael Brennan, Tim Burch, Indraneel Chakraborty, Vidhi Chhaochharia, Ric Colacito, Robert Dittmar, Adam Farago, Andrea Gamba, Gikas Hardouvelis, Alex Horenstein, Petri Jylha, Marcin Kacperczyk, Paul Karehnke, George Korniotis, Roman Kozhan, Alok Kumar, Marie Lambert, Alex Michaelides, David Miles, Paulo Santos Monteiro, Philippe Mueller, Cesare Robotti, Bryan Routledge, Christian Schlag, Maik Schmeling, David Schreindorfer, George Skiadopoulos, Peter Smith, Peter Spencer, Alex Stremme, Roméo Tédongap, John Thanassoulis, Fabio Trojani, Emmanuel Tsiritakis, Raman Uppal, Ansgar Walther, Michael Weber, Mike Wickens, and seminar participants at Imperial College, Inquire UK, the University of Miami, the University of Piraeus, the University of York, the University of Warwick, the 2015 Paris Financial Management Conference, the 2016 Midwest Finance Association (MFA) Annual Meeting, the 2016 Sustainable Architecture for Finance in Europe (SAFE) Asset Pricing Workshop, the 2016 Paris December Finance Meeting, the 2017 Financial Management Association (FMA) Europe Conference, the 2017 Western Finance Association (WFA) Conference, and the 2017 European Finance Association (EFA) Annual Meeting.

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