Advanced Search
MyIDEAS: Login

Consumption, Growth and Asset Pricing: A Regime Switching and Robust Control

Contents:

Author Info

  • Sel Dibooglu
  • Turalay Kenc

Abstract

We extends the aggregate risk modeling approach to include the regime switching risk triggered by a `regime shift' in economic conditions and to uncertainty aversion (robust control). We use a regime switching process rather than the popular diffusion-jump process for a number of reasons. Firstly, regime switching processes are better suited to analyzing economic business cycles than is the diffusion-jump process. Secondly, in a regime switching process, the (drift and diffusion) parameters of the stochastic process are regime specific. Finally, the regime switching process captures the fact that risk premia seem to be higher at business cycle troughs than they are at peaks. As for the robust control feature of the model, we adopt a kappa-ignorance framework, which is a special case of the recursive multiple-priors model. This framework results in a portfolio rule which is observationally equivalent to an effective decrease in the mean of wealth (risky asset). The clear advantage of using the robust control approach is that the portfolio rule gives rise to the risk premium due to ``first-order risk aversion'' since the risk premium is proportional to the instantaneous standard deviation of the aggregate state variable. With these two features, the framework will be better suited to analyze consumption, growth and asset pricing issues.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 360.

as in new window
Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:360

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

Related research

Keywords: Asset pricing; growth; consumption; regime switching; robust control;

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:360. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.