Dynamic General Equilibrium and T-Period Fund Separation
AbstractWe consider a dynamic general equilibrium model with incomplete markets in which we derive conditions for separating the savings decision from the asset allocation decision. It is shown that with logarithmic utility functions this separation holds for any heterogeneity of discount factors while the generalization to constant relative risk aversion only holds for homogeneous discount factors. Our results have simple asset pricing implications for the time series and also the cross section of asset prices. It is found that on data from the DJIA a risk aversion weaker than in the logarithmic case fits best.
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Bibliographic InfoPaper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2005/16.
Length: 36 pages
Date of creation: 22 Dec 2005
Date of revision:
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Dynamic general equilibrium model; asset pricing;
Find related papers by JEL classification:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-DGE-2006-10-28 (Dynamic General Equilibrium)
- NEP-UPT-2006-10-28 (Utility Models & Prospect Theory)
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