intense debate. Two main families of models claim to solve this puzzle: habit-formation models and loss-aversion models. The … the observed data. The loss aversion model and the internal habit model could fit the observed excess return evolution …

-pricing economy. Expectations-based loss aversion increases the equity premium and decreases the consumption-wealth ratio, because … painful, the agent wants to postpone such cuts to let his reference point decrease. Thus, even though shocks are i.i.d., loss …