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Evaluating Asset Pricing Implications of DSGE Models

Listed author(s):
  • Kevin L. Reffett

    (Arizona State University)

  • Frank Schorfheide

    (University of Pennsylvania)

This paper conducts an econometric evaluation of structural macroeconomic asset pricing models. A one-sector dynamic stochastic general equilibrium model (DSGE) with habit formation and capital adjustment costs is considered. Based on the log-linearized DSGE model, a Gaussian probability model for the joint distribution of aggregate consumption, investment, and a vector of asset returns R(t) is specified. We facilitate the stochastic discount factor M(t) representation obtained from the DSGE model and impose the no-arbitrage condition E[M(t)R(t)|t-1]=1. In addition to the full general equilibrium model, we also consider consumption and production based partial equilibrium specifications, and a more general reference model. To evaluate the various asset pricing models we compute posterior model probabilities and loss function based measures of model adequacy.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1630.

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Date of creation: 01 Aug 2000
Handle: RePEc:ecm:wc2000:1630
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