Recent empirical evidence suggests that the compensation for rare events accounts for a large fraction of the average equity and variance premia. I replicate this fact in a parsimonious consumption-based asset pricing model based on a (generalized) disappointment averse investor and...

We show empirically that negative stock market returns are significantly more painful to investors when they occur in periods of low volatility, which is reflected in a steeper pricing kernel. In contrast, popular asset pricing theories imply that the pricing of stock market risk does not vary...