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Asset Pricing in a Production Economy with Chew–Dekel Preferences

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  • CAMPANALE, Claudio
  • CASTRO, Rui
  • CLEMENTI, Gian Luca

Abstract

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.

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Bibliographic Info

Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2009-09.

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Length: 49 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mtl:montde:2009-09

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Keywords: Disappointment Aversion; Epstein–Zin; Market Price of Risk; Equity Premium; Business Cycle;

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  3. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
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  18. Jacob K. Goeree & Charles A. Holt, 2000. "A Model of Noisy Introspection," Virginia Economics Online Papers 343, University of Virginia, Department of Economics.
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  20. Dimitris Papanikolaou, 2008. "Investment-Specific Technological Change and Asset Prices," 2008 Meeting Papers 637, Society for Economic Dynamics.
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