Asset Pricing with Delayed Consumption Decisions

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Asset Pricing with Delayed Consumption Decisions

Author Info

Willi Semmler
Lars GrÃ¼ne

Additional information is available for the following registered author(s):

Willi Semmler Sr.

Abstract

The attempt to match characteristics of asset pricing models such as the risk-free interest rate, equity premium and the Sharpe ratio for models with instantaneous consumption decisions in the context of stochastic growth models has not been very successful. Many recent versions of asset pricing models have, in order to match those financial characteristics better with the data, employed habit formation models where there is a delay in consumption decisions. Yet the results of those studies may depend on the solution techniques employed to solve the stochastic dynamic optimization model. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the above mentioned asset price characteristics with delayed consumption decisions, where the delayed consumption decision is treated as an additional state variable of the model. Since our method produces only negligible errors it is suitable to be used as solution technique for elaborate stochastic growth models with a delayed decision structure.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 59.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:59

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Find related papers by JEL classification:
C - Mathematical and Quantitative Methods
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

This paper has been announced in the following NEP Reports:

NEP-ALL-2004-08-16 (All new papers)
NEP-FIN-2004-08-16 (Finance)

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