Computational Methods for Production-Based Asset Pricing Models with Recursive Utility
AbstractWe compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improve- ments for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.
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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 10-90.
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
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Web page: http://econ.duke.edu/
DSGE Models; Nonlinear Solution Methods; Numerical Dynamic Program- ming; Recursive Utility; Asset Pricing;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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- Angelo M. Fasolo, 2011. "The Accuracy of Perturbation Methods to Solve Small Open Economy Models," Working Papers Series 262, Central Bank of Brazil, Research Department.
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