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Asset Pricing in a Production Economy with Chew–Dekel Preferences

  • CAMPANALE, Claudio
  • CASTRO, Rui
  • CLEMENTI, Gian Luca

In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew–Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein–Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model.

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File URL: http://hdl.handle.net/1866/3994
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2009-09.

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Length: 49 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:mtl:montde:2009-09
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  19. Thomas Palfrey, 2002. "Quantal Response Equilibrium and Overbidding in Private Value Auctions," Theory workshop papers 357966000000000089, UCLA Department of Economics.
  20. Barnett, Steven A. & Sakellaris, Plutarchos, 1998. "Nonlinear response of firm investment to Q:: Testing a model of convex and non-convex adjustment costs1," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 261-288, July.
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