On the Economic Impact of Modeling Non-Linearities: The Asset Pricing Example
We investigate the economic importance of modeling non-linearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a non-linear threshold autoregression. The asset pricing model with non-linear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling non-linearities is less than 0.01 percent per annum.
|Date of creation:||Nov 2003|
|Date of revision:|
|Publication status:||Forthcoming in Macroeconomic Dynamics|
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