Pricing of the Time-Change Risks
AbstractWe develop a discrete-time real endowment economy featuring Epstein-Zin recursive utility and a Levy time-change subordinator, which represents a clock that connects business time to calendar time. This setup provides a convenient equilibrium framework for pricing non-Gaussian risks, where the solutions for financial prices are available up to integral operations in general, or in closed-form for tempered stable shocks. The non-Gaussianity of fundamentals due to time-deformation induces compensations for higher order moments and co-moments of consumption and dividend growth rates of the assets. Forecastability of the time change leads to predictability of the endowment streams and therefore to time-variation in financial prices and risk premia on assets. In numerical calibrations, we quantitatively analyze the compensations for different types of systematic risk.
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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 10-10.
Date of creation: 2010
Date of revision:
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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
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Web page: http://econ.duke.edu/
Risk premium; time change; Levy processes; recursive preferences;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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