Asset pricing with return extrapolation

We present a new model of asset prices in which representative agent has extrapolative beliefs about stock market returns and Epstein-Zin preferences. The quantitatively explains facts prices, return expectations, cash-flow expectations. When the agent’s are calibrated to survey expectations investors, generates excess volatility predictability returns, high equity premium, low stable risk-free rate, correlation between consumption growth. Moreover, implications for future cash flows that consistent with empirical findings.