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Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production

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  • Albert Marcet

Abstract

A new algorithm called the parameterized expectations approach (PEA) for solving dynamic stochastic models under rational expectations is developed and its advantages and disadvantages are discussed. This algorithm can, in principle, approximate the true equilibrium arbitrarily well. Also, this algorithm works from the Euler equations, so that the equilibrium does not have to be cast in the form of a planner's problem. Monte--Carlo integration and the absence of grids on the state variables, cause the computation costs not to go up exponentially when the number of state variables or the exogenous shocks in the economy increase. \\ As an application we analyze an asset pricing model with endogenous production. We analyze its implications for time dependence of volatility of stock returns and the term structure of interest rates. We argue that this model can generate hump--shaped term structures.

Suggested Citation

  • Albert Marcet, 1991. "Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production," Economics Working Papers 5, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:5
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    References listed on IDEAS

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    1. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
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    4. William A. Brock & Leonard J. Mirman, 2001. "Optimal Economic Growth And Uncertainty: The Discounted Case," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 1, pages 3-37, Edward Elgar Publishing.
    5. Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, vol. 59(4), pages 1091-1104, July.
    6. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46, National Bureau of Economic Research, Inc.
    7. John J. McCall, 1982. "The Economics of Information and Uncertainty," NBER Books, National Bureau of Economic Research, Inc, number mcca82-1, March.
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    Cited by:

    1. Fabio Canova & Eva Ortega, 1996. "Testing calibrated general equilibrium models," Economics Working Papers 166, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Nicolae POP & Adriana AGAPIE & Nicolae TEODORESCU, 2009. "An algorithmic approach for modelling customer expectations," Management & Marketing, Economic Publishing House, vol. 4(1), Spring.
    3. Boucekkine, Raouf, 1992. "Quelques idées simples pour la simulation stochastique des modèles non-linéaires à anticipations rationnelles et méthodes de validation," CEPREMAP Working Papers (Couverture Orange) 9215, CEPREMAP.
    4. Bansal, Ravi & Gallant, A. Ronald & Hussey, Robert & Tauchen, George, 1995. "Nonparametric estimation of structural models for high-frequency currency market data," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 251-287.

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