IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The term structure of interest rates in a DSGE model with recursive preferences

  • van Binsbergen, Jules H.
  • Fernández-Villaverde, Jesús
  • Koijen, Ralph S.J.
  • Rubio-Ramírez, Juan

A dynamic stochastic general equilibrium (DSGE) model in which households have Epstein and Zin recursive preferences is solved with perturbation. The parameters governing preferences and technology are estimated by maximum likelihood using macroeconomic data and the term structure of interest rates. The estimates imply a large risk aversion, an elasticity of intertemporal substitution higher than one, and substantial adjustment costs. Furthermore, the paper identifies the tensions within the model by estimating it on subsets of these data. The analysis concludes by pointing out potential extensions that may improve the model's fit.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0304393212000918
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 59 (2012)
Issue (Month): 7 ()
Pages: 634-648

as
in new window

Handle: RePEc:eee:moneco:v:59:y:2012:i:7:p:634-648
DOI: 10.1016/j.jmoneco.2012.09.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mariano M. Croce, 2006. "Welfare Costs, Long Run Consumption Risk, and a Production Economy," 2006 Meeting Papers 582, Society for Economic Dynamics.
  2. Bianca De Paoli, Alasdair Scott, Olaf Weeken, 2007. "Asset pricing implications for a New Keynesian model," Money Macro and Finance (MMF) Research Group Conference 2006 156, Money Macro and Finance Research Group.
  3. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  4. Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
  5. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  6. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Jason Beeler & John Y. Campbell, 2009. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," NBER Working Papers 14788, National Bureau of Economic Research, Inc.
  8. Taeyoung Doh, 2009. "Yield curve in an estimated nonlinear macro model," Research Working Paper RWP 09-04, Federal Reserve Bank of Kansas City.
  9. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
  10. Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375, March.
  11. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
  12. Claudio Campanale & Rui Castro & Gian Luca Clementi, 2007. "Asset Pricing in a Production Economy with ChewÐDekel Preferences," Working Paper Series 07_07, The Rimini Centre for Economic Analysis.
  13. Dario Caldara & Jesus Fernandez-Villaverde & Juan Rubio-Ramirez & Wen Yao, 2012. "Computing DSGE Models with Recursive Preferences and Stochastic Volatility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 188-206, April.
  14. David K. Backus & Bryan R. Routledge & Stanley E. Zin, 2005. "Exotic Preferences for Macroeconomists," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 319-414 National Bureau of Economic Research, Inc.
  15. Hanno Lustig & Stijn Van Nieuwerburg & Adrien Verdelhan, 2007. "The Wealth-Consumption Ratio: A Litmus Test for Consumption-based Asset Pricing Models¤," Boston University - Department of Economics - Working Papers Series WP2007-030, Boston University - Department of Economics.
  16. Sydney C. Ludvigson & Xiaohong Chen & Jack Favilukis, 2007. "An Estimation of Economic Models with Recursive," FMG Discussion Papers dp603, Financial Markets Group.
  17. Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
  18. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
  19. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  20. Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, 04.
  21. Daniel McFadden, 1987. "A Method of Simulated Moments for Estimation of Discrete Response Models Without Numerical Integration," Working papers 464, Massachusetts Institute of Technology (MIT), Department of Economics.
  22. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
  23. Marin, Dalia & Verdier, Thierry, 2008. "Corporate Hierarchies and the Size of Nations: Theory and Evidence," CEPR Discussion Papers 6734, C.E.P.R. Discussion Papers.
  24. Levine, Paul & Pearlman, Joseph G. & Pierse, Richard, 2007. "Linear-quadratic approximation, external habit and targeting rules," Working Paper Series 0759, European Central Bank.
  25. Xiaohong Chen & Jack Favilukis & Sydney C. Ludvigson, 2013. "An estimation of economic models with recursive preferences," Quantitative Economics, Econometric Society, vol. 4(1), pages 39-83, 03.
  26. Dario Caldara & Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Wen Yao, 2009. "Computing DSGE Models with Recursive Preferences," PIER Working Paper Archive 09-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  27. repec:rim:rimwps:07-07 is not listed on IDEAS
  28. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, March.
  29. Hansen, Lars Peter & Heaton, John & Lee, Junghoon & Roussanov, Nikolai, 2007. "Intertemporal Substitution and Risk Aversion," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 61 Elsevier.
  30. Martin Uribe & Stephanie Schmitt-Grohe, 2005. "Optimal Fiscal and Monetary Policy In A Medium Scale Macro Model," Computing in Economics and Finance 2005 476, Society for Computational Economics.
  31. Lustig, Hanno & van Nieuwerburgh, Stijn & Verdelhan, Adrien, 2012. "The Wealth-Consumption Ratio," CEPR Discussion Papers 9022, C.E.P.R. Discussion Papers.
  32. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  33. Eric T. Swanson, 2009. "Risk aversion, the labor margin, and asset pricing in DSGE models," Working Paper Series 2009-26, Federal Reserve Bank of San Francisco.
  34. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Research 143, National Bank of Belgium.
  35. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 29-42.
  36. Francisco Gomes & Alexander Michaelides, 2003. "Optimal life-cycle asset allocation: understanding the empirical evidence," LSE Research Online Documents on Economics 24900, London School of Economics and Political Science, LSE Library.
  37. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version," NBER Working Papers 11417, National Bureau of Economic Research, Inc.
  38. Peralta Alva, Adrián & Santos, Manuel S., 2003. "Accuracy of simulations for stochastic dynamic models," UC3M Working papers. Economics we034615, Universidad Carlos III de Madrid. Departamento de Economía.
  39. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  40. Lars Peter Hansen & Thomas J. Sargent & Thomas D. Tallarini Jr., 1997. "Robust Permanent Income and Pricing," Levine's Working Paper Archive 596, David K. Levine.
  41. Ralph S. J. Koijen & Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2010. "Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk," American Economic Review, American Economic Association, vol. 100(2), pages 552-56, May.
  42. Martin Andreasen, 2010. "How to Maximize the Likelihood Function for a DSGE Model," Computational Economics, Springer;Society for Computational Economics, vol. 35(2), pages 127-154, February.
  43. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
  44. Andreasen , Martin & Zabczyk, Pawel, 2011. "An efficient method of computing higher-order bond price perturbation approximations," Bank of England working papers 416, Bank of England.
  45. Kocherlakota, Narayana R, 1990. " Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result," Journal of Finance, American Finance Association, vol. 45(1), pages 175-90, March.
  46. John Y. Campbell & John H. Cochrane, 1999. "Explaining the Poor Performance of Consumption-Based Asset Pricing Models," NBER Working Papers 7237, National Bureau of Economic Research, Inc.
  47. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.
  48. Lars Peter Hansen & John Heaton & Nan Li, 2005. "Consumption Strikes Back?: Measuring Long-Run Risk," NBER Working Papers 11476, National Bureau of Economic Research, Inc.
  49. Andrew Ang & Sen Dong, 2005. "No-Arbitrage Taylor Rules," 2005 Meeting Papers 22, Society for Economic Dynamics.
  50. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
  51. Dolmas, Jim, 1996. "Balanced-growth-consistent recursive utility," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 657-680, April.
  52. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  53. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
  54. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  55. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  56. Claudio Campanale & Rui Castro & Gian Luca Clementi, 2007. "Asset Pricing in a Production Economy with Chew-Dekel Preferences," Working Papers 07-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  57. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  58. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  59. Fermanian, Jean-David & Salani , Bernard, 2004. "A Nonparametric Simulated Maximum Likelihood Estimation Method," Econometric Theory, Cambridge University Press, vol. 20(04), pages 701-734, August.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:59:y:2012:i:7:p:634-648. 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: (Shamier, Wendy)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.