This paper studies a nonexpected utility, general equilibrium asset pricing model in which market fundamentals follow a bivariate Markov switching process. The results show that nonexpected utility is capable of exactly matching the means of the risk-free rate and the risk premium. Asymmetric market fundamentals are capable of generating a negative sample correlation between the risk-free rate and the risk premium. Moreover, an equilibrium asset pricing model endowed with asymmetric market fundamentals is consistent with all five first and second moments of the risk-free rate and the risk premium in the U.S. data.
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