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Asset pricing and the role of macroeconomic volatility

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  • Stefano d’Addona
  • Christos Giannikos

Abstract

Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This study provides a simple extension to the prior literature by studying an economy that follows a regime-switching process in conjunction with Epstein–Zin preferences for 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 financial figures in line with US postwar data. Furthermore, we provide evidence in support of modeling a regime-dependent macroeconomic risk. Copyright Springer-Verlag Berlin Heidelberg 2014

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  • Stefano d’Addona & Christos Giannikos, 2014. "Asset pricing and the role of macroeconomic volatility," Annals of Finance, Springer, vol. 10(2), pages 197-215, May.
    • Handle: RePEc:kap:annfin:v:10:y:2014:i:2:p:197-215
    DOI: 10.1007/s10436-013-0237-2
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    More about this item

    Keywords

    Asset pricing; Real Business Cycle Models; Recursive preferences; Markov switching models; G12; E32; E23;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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