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Dynamic General Equilibrium and T-Period Fund Separation

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  • Gerber, Anke

    ()
    (Institute for Empirical Research in Economics, University of Zurich)

  • Hens, Thorsten

    ()
    (Institute for Empirical Research in Economics, University of Zurich)

  • Woehrmann, Peter

    ()
    (Institute for Empirical Research in Economics, University of Zurich)

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    Abstract

    We 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 Info

    Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2005/16.

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    Length: 36 pages
    Date of creation: 22 Dec 2005
    Date of revision:
    Handle: RePEc:hhs:nhhfms:2005_016

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    Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
    Phone: +47 55 95 92 93
    Fax: +47 55 95 96 50
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    Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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    Keywords: Dynamic general equilibrium model; asset pricing;

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    References

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    1. Igor Evstigneev & Thorsten Hens & Klaus Schenk-Hoppé, 2006. "Evolutionary stable stock markets," Economic Theory, Springer, Springer, vol. 27(2), pages 449-468, January.
    2. James Tobin, 1956. "Liquidity Preference as Behavior Towards Risk," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 14, Cowles Foundation for Research in Economics, Yale University.
    3. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
    4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    5. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, American Finance Association, vol. 55(4), pages 1515-1567, 08.
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    7. Jérôme B. Detemple & Piero Gottardi, 1997. "Aggregation, Efficiency and Mutual Fund Separation in Incomplete Markets," CIRANO Working Papers, CIRANO 97s-11, CIRANO.
    8. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers, University of Iowa, Department of Economics 95-05, University of Iowa, Department of Economics.
    9. Wouter J. den Haan & Albert Marcet, 1993. "Accuracy in simulations," Economics Working Papers 42, Department of Economics and Business, Universitat Pompeu Fabra.
    10. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1533-1597, 08.
    11. Hens, Thorsten & Reimann, Stefan & Vogt, Bodo, 2004. "Nash competitive equilibria and two-period fund separation," Journal of Mathematical Economics, Elsevier, vol. 40(3-4), pages 321-346, June.
    12. Kraus, Alan & Litzenberger, Robert H, 1975. "Market Equilibrium in a Multiperiod State Preference Model with Logarithmic Utility," Journal of Finance, American Finance Association, American Finance Association, vol. 30(5), pages 1213-27, December.
    13. Hakansson, Nils H, 1970. "Optimal Investment and Consumption Strategies Under Risk for a Class of Utility Functions," Econometrica, Econometric Society, Econometric Society, vol. 38(5), pages 587-607, September.
    14. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
    15. Russell, Thomas, 1980. "Portfolio separation : The analytic case," Economics Letters, Elsevier, vol. 6(1), pages 59-66.
    16. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, Elsevier, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
    17. Rubinstein, Mark, 1976. "The Strong Case for the Generalized Logarithmic Utility Model as the Premier Model of Financial Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 31(2), pages 551-71, May.
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