Surplus Utility and Intertemporal Asset Pricing
- 1Department of Economics and Finance, Manhattan University, Riverdale, NY 10471, USA
Abstract
I develop a lifecycle asset pricing model with reference-dependent preferences in which agents derive intertemporal gain–loss utility from consumption relative to a forward-looking reference point. Unlike prior applications of such preferences that effectively rely on habit-like, backward-looking reference formation, my model adopts a forward-looking, expectation-based reference point. I introduce a surplus utility ratio that captures deviations of realized consumption utility from reference utility and derive the stochastic discount factor in closed form. The resulting pricing kernel incorporates three sources of risk: consumption-growth risk, surplus-utility risk, and loss-aversion risk. I show analytically how these components contribute to the equity premium and characterize their interactions under alternative specifications of the gain–loss function. The model is shown to generate, in steady states, a theoretical equity premium consistent with the observed magnitude in the data while maintaining standard levels of both risk aversion and loss aversion. The model also generates non-monotonic lifecycle consumption profiles and provides a basis for revisiting the permanent income hypothesis when reference points are formed through forward-looking expectations.
Related
- Specification LASSO and a Flexible Characteristics-Based Asset Pricing Model
- Designed Dependence for Tractable Two-Asset First-Passage Pricing
- Financial Literacy and the Functional Shape of Subjective Time Deformation in Intertemporal Choice
- A finite forbidden family with superlinear surplus and non-join extremal graphs
- Regularity of the Value Function in Multi-Asset Portfolio Selection with Proportional Transaction Costs
BibTeX
@article{park2026surplus,
title = {{Surplus Utility and Intertemporal Asset Pricing}},
author = {Hyeon Park},
journal = {Mathematics},
year = {2026},
month = oct,
doi = {10.3390/math14203678},
url = {https://www.mdpi.com/2227-7390/14/20/3678},
note = {CC BY 4.0},
}
RIS
TY - JOUR
TI - Surplus Utility and Intertemporal Asset Pricing
AU - Hyeon Park
PY - 2026
DA - 2026/10/10
JO - Mathematics
DO - 10.3390/math14203678
UR - https://www.mdpi.com/2227-7390/14/20/3678
AB - I develop a lifecycle asset pricing model with reference-dependent preferences in which agents derive intertemporal gain–loss utility from consumption relative to a forward-looking reference point. Unlike prior applications of such preferences that effectively rely on habit-like, backward-looking reference formation, my model adopts a forward-looking, expectation-based reference point. I introduce a surplus utility ratio that captures deviations of realized consumption utility from reference utility and derive the stochastic discount factor in closed form. The resulting pricing kernel incorporates three sources of risk: consumption-growth risk, surplus-utility risk, and loss-aversion risk. I show analytically how these components contribute to the equity premium and characterize their interactions under alternative specifications of the gain–loss function. The model is shown to generate, in steady states, a theoretical equity premium consistent with the observed magnitude in the data while maintaining standard levels of both risk aversion and loss aversion. The model also generates non-monotonic lifecycle consumption profiles and provides a basis for revisiting the permanent income hypothesis when reference points are formed through forward-looking expectations.
SN - 2227-7390
ER -