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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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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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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. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
  2. Claudio Campanale & Rui Castro & Gian Luca Clementi, 2010. "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 379-402, April.
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