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This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries. An important feature of these general preferences is that they permit risk attitudes to be disentangled from the degree of intertemporal substitutability. Moreover, in an infinite horizon, representative agent context these preference specifications lead to a model of asset returns in which appropriate versions of both the atemporal CAPM and the intertemporal consumption-CAPM are nested as special cases. In our general model, systematic risk of an asset is determined by covariance with both the return to the market portfolio and consumption growth, while in each of the existing models only one of these factors plays a role. This result is achieved despite the homotheticity of preferences and the separability of consumption and portfolio decisions. Two other auxiliary analytical contributions which are of independent interest are the proofs of (i) the existence of recursive intertemporal utility functions, and (ii) the existence of optima to corresponding optimization problems. In proving (i), it is necessary to define a suitable domain for utility functions. This is achieved by extending the formulation of the space of temporal lotteries in Kreps and Porteus (1978) to an infinite horizon framework. A final contribution is the integration into a temporal setting of a broad class of atemporal non-expected utility theories. For homogeneous members of the class due to Chew (1985) and Dekel (1986), the corresponding intertemporal asset pricing model is derived.

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We provide an axiomatic model of preferences over atemporal risks that generalizes Gul's disappointment aversion model by allowing risk aversion to be "first order" at locations in the state space that do not correspond to certainty. Since the lotteries being valued by an agent in an assetpricing context are not typically local to certainty, our generalization, when embedded in a dynamic recursive utility model, has important quantitative implications for financial markets. We show that the state-price process, or asset-pricing kernel, in a Lucas-tree economy in which the representative agent has generalized disappointment aversion preferences is consistent with the pricing kernel that resolves the equity-premium puzzle. We also demonstrate that a small amount of conditional heteroskedasticity in the endowment-growth process is necessary to generate these favorable results. In addition, we show that risk aversion in our model can be both state-dependent and countercyclical, which empirical research has demonstrated is necessary for explaining observed assetpricing behavior.

This paper Integrates Yaari's dual theory of choice under uncertamty into a multiperiod context and examines its imphcations for the equity premium puzzle. An Important property of these preferences IS that of 'tirst-order risk aversion' which implies. in our model. that the risk premium for a small gamble is proportronal to the standard deviation rather than the variance. Since the standard devration of the growth rate m aggregate consumptron is considerably larger than Its varrance, the model can generate both a small rusk-free rate and a moderate equity premmm.