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Parameter interchangeability under recursive utility with housing

Author

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  • Asiye Aydilek

    (Gulf University for Science and Technology
    Gulf University for Science and Technology)

  • Harun Aydilek

    (Gulf University for Science and Technology
    Gulf University for Science and Technology)

Abstract

We investigate the interchangeability of two central elements of most macroeconomic models, the parameter of intertemporal substitution and time discount rate. We use a recursive utility model during retirement with housing, uncertain life time and risky stock prices since recursive utility is more flexible and general and includes expected utility as a special case. The retiree makes consumption, housing, stock and bond investment decisions. We first provide the analytical solution of retiree decisions. We realistically calibrate our model and simulate the stock returns. Our calibrated model mimics the consumption data for homeowners well. The model qualitatively explains decreasing stock and bond holdings after retirement. Then, we investigate the interchangeability of two important parameters, the parameter of intertemporal substitution and discount rate since they have similar effects on retiree decisions. We show that the parameters of intertemporal substitution and discount rate are not interchangeable analytically. Exploring the interchangeability of parameters is important and fruitful since interchangeable parameters will help to make estimation of some parameters easier. Interchangeability will simplify the solution.

Suggested Citation

  • Asiye Aydilek & Harun Aydilek, 2018. "Parameter interchangeability under recursive utility with housing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(4), pages 807-817, October.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:4:d:10.1007_s12197-018-9433-2
    DOI: 10.1007/s12197-018-9433-2
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    References listed on IDEAS

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    Cited by:

    1. Asiye Aydilek & Harun Aydilek, 2020. "An optimization model of retiree decisions under recursive utility with housing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 258-277, April.
    2. Aydilek, Harun & Aydilek, Asiye, 2020. "Do we really need heterogeneous agent models?," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 147-153.

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    More about this item

    Keywords

    Time discount; Elasticity of intertemporal substitution; Interchangeability; Housing; Recursive utility; Retirement;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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