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Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

Author

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  • Eric M. Aldrich
  • Howard Kung

Abstract

We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improve- ments for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Suggested Citation

  • Eric M. Aldrich & Howard Kung, 2010. "Computational Methods for Production-Based Asset Pricing Models with Recursive Utility," Working Papers 10-90, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:10-90
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    Citations

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    Cited by:

    1. Angelo M. Fasolo, 2011. "The Accuracy of Perturbation Methods to Solve Small Open Economy Models," Working Papers Series 262, Central Bank of Brazil, Research Department.
    2. Branger, Nicole & Grüning, Patrick & Schlag, Christian, 2016. "Commodities, financialization, and heterogeneous agents," SAFE Working Paper Series 131 [rev.], Leibniz Institute for Financial Research SAFE, revised 2016.
    3. Fernández-Villaverde, J. & Rubio-Ramírez, J.F. & Schorfheide, F., 2016. "Solution and Estimation Methods for DSGE Models," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 527-724, Elsevier.
    4. Fabian Goessling, 2019. "Exact Expectations: Efficient Calculation of DSGE Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 977-990, March.
    5. 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.

    More about this item

    Keywords

    DSGE Models; Nonlinear Solution Methods; Numerical Dynamic Program- ming; Recursive Utility; Asset Pricing;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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