Regret and Asset Pricing
Abstract: I investigate the consequences of regret aversion for asset prices in an otherwise standard model of financial markets. This paper shows that accounting for investors' regret aversion can help explain the equity premium puzzle, excess volatility, the term structure of the risk premium, and the predictability of stock returns both in the time series
and in the cross section. Moreover, the model produces realistic bond yields. Overall, this paper is among the first to document the linkage between regret aversion and many stylized facts concerning asset prices.