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On The Economic Impact Of Modeling Nonlinearities: The Asset Pricing Example

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  • BIDARKOTA, PRASAD V.

Abstract

We investigate the economic importance of modeling nonlinearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a nonlinear threshold autoregression. The asset pricing model with nonlinear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling nonlinearities is small.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 10 (2006)
Issue (Month): 01 (February)
Pages: 56-76

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Handle: RePEc:cup:macdyn:v:10:y:2006:i:01:p:56-76_05

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  11. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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