The standard, representative agent, consumption-based asset pricing theory based on CRRA utility fails to explain the average returns of risky assets. When evaluated on cross- sections of stock returns, the model generates economically large unconditional Euler equation errors. Unlike the equity...

The solution to dynamic portfolio choice models can be formulated in terms of a value function by the Bellman principle of optimality, which reduces the multi-period optimal policy choice problem to a sequence of one-period maximization problems. For two adjacent periods, economists compute the...

This paper shows that the consumption-based asset pricing model (C-CAPM) with low-probability disaster risk rationalizes large pricing errors, i.e., Euler equation errors. This result is remarkable, since Lettau and Ludvigson (2009) show that leading asset pricing models cannot explain sizeable...