Disappointment Aversion, Asset Pricing and Measuring Asymmetric Dependence

We develop a measure of asymmetric dependence (AD) that is consistent with investors who are averse to disappointment in the utility framework proposed by Skiadas (1997). Using a Skiadas-consistent utility function, we show that disappointment aversion implies that asymmetric joint return distribu tions impact investor utility. From an asset pricing perspective, we demonstrate that the consequence of these preferences for the realization of a given state results in a pricing kernel adjustment reflecting the degree to which these preferences represent a departure from expected utility behaviour. Consequently, we argue that capturing economically meaningful AD requires a metric that captures the relative differ ences in the shape of the dependence in the upper and lower tail. Such a metric is better able to capture AD than commonly used competing methods.