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Asset Pricing And The Role Of Macroeconomic Volatility

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  • Stefano D'Addona

    (University of Roma Tre)

  • Christos Giannikos

    (Zicklin School of Business)

Abstract

Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This paper provides a simple extension to the prior literature where we study an economy that follows a regimes switching process both in the mean and the volatility, in conjunction with Epstein-Zin preferences for the consumers. We provide a detailed theoretical and numerical analysis of the model's predictions. We also show that a reasonable parameterization of our model conveys reasonable financial figures. Furthermore, we provide evidence in support of the necessity to model the decline of macroeconomic risk in this particular class of models.

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File URL: http://host.uniroma3.it/centri/crei/pubblicazioni/workingpapers2011/CREI_07_2011.pdf
File Function: First version, 2011
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Bibliographic Info

Paper provided by CREI Università degli Studi Roma Tre in its series Working Papers with number 0711.

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Length: 51 pages
Date of creation: 2011
Date of revision: 2011
Handle: RePEc:rcr:wpaper:07_11

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Related research

Keywords: Asset Pricing; Real Business Cycle Models; Recursive Preferences; Markov Switching Models;

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References

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