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Asset Pricing in a Production Economy with Chew-Dekel Preferences

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  • Claudio Campanale

    (Universidad de Alicante)

  • Rui Castro

    (Universite de Montreal)

  • Gian Luca Clementi

    (New York University)

Abstract

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew-Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein--Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2009.06.005
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 2 (April)
Pages: 379-402

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Handle: RePEc:red:issued:07-51

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Related research

Keywords: Disappointment aversion; First-order risk aversion; Epstein-Zin; Market price of risk; Equity premium; Business cycle;

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References

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  1. Jacob K. Goeree & Charles A. Holt & Thomas R. Palfrey, 2000. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Virginia Economics Online Papers 345, University of Virginia, Department of Economics.
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  12. CAMPANALE, Claudio & CASTRO, Rui & CLEMENTI, Gian Luca, 2009. "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Cahiers de recherche 10-2009, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  13. Syngjoo Choi & Raymond Fisman & Douglas Gale & Shachar Kariv, 2007. "Consistency and Heterogeneity of Individual Behavior under Uncertainty," American Economic Review, American Economic Association, vol. 97(5), pages 1921-1938, December.
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  16. Goeree, Jacob K. & Holt, Charles A., 2004. "A model of noisy introspection," Games and Economic Behavior, Elsevier, vol. 46(2), pages 365-382, February.
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  19. Paul Gomme & Peter Rupert, 2005. "Theory, measurement, and calibration of macroeconomic models," Working Paper 0505, Federal Reserve Bank of Cleveland.
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