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Solving OLG Models with Many Cohorts, Asset Choice and Large Shocks

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  • Reiter, Michael

    (Institute for Advanced Studies, Vienna)

Abstract

The paper presents a computationally efficient method to solve overlapping generations models with asset choice. The method is used to study an OLG economy with many cohorts, up to 3 different assets, stochastic volatility, short-sale constraints, and subject to rather large technology shocks. On the methodological side, the main findings are that global projection methods with polynomial approximations of degree 3 are sufficient to provide a very precise solution, even in the case of large shocks. Globally linear approximations, in contrast to local linear approximations, are sufficient to capture the most important financial statistics, including not only the average risk premium, but also the variation of the risk premium over the cycle. However, global linear approximations are not sufficient to reliably pin down asset choices. With a risk aversion parameter of only 4, the model generates a price of risk, measured as the Sharpe ratio, that is almost half of what it is for US stocks. However, the asset price fluctuations and the equity premium are much smaller than in US data.

Suggested Citation

  • Reiter, Michael, 2015. "Solving OLG Models with Many Cohorts, Asset Choice and Large Shocks," Economics Series 320, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:320
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    File URL: https://irihs.ihs.ac.at/id/eprint/3875
    File Function: First version, 2015
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    References listed on IDEAS

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    Cited by:

    1. Grzegorz R. Dlugoszek, 2016. "Solving DSGE Portfolio Choice Models with Asymmetric Countries," SFB 649 Discussion Papers SFB649DP2016-009, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Amaral, Pedro S., 2023. "The demographic transition and the asset supply channel," European Economic Review, Elsevier, vol. 151(C).
    3. Dan Cao & Wenlan Luo & Guangyu Nie, 2023. "Global GDSGE Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 199-225, December.

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    More about this item

    Keywords

    OLG models; asset choice; projection methods;
    All these keywords.

    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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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