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Asset Pricing in a Production Economy with Chew-Dekel Preferences

  • Claudio Campanale
  • Rui Castro
  • Gian Luca Clementi

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. (Copyright: Elsevier)

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Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 07-12.

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Date of creation: 2007
Date of revision:
Handle: RePEc:ste:nystbu:07-12
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New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126

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  1. Gomme, Paul & Rupert, Peter, 2007. "Theory, measurement and calibration of macroeconomic models," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 460-497, March.
  2. Marco Antonio Bonomo & Rene Garcia, 1993. "Disappointment aversion as a solution to the equity premium and the risk-free rate puzzles," Textos para discussão 308, Department of Economics PUC-Rio (Brazil).
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  19. repec:rim:rimwps:07-07 is not listed on IDEAS
  20. Kocherlakota, Narayana R., 1990. "On tests of representative consumer asset pricing models," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 285-304, October.
  21. Jacob K. Goeree & Charles A. Holt & Thomas R. Palfrey, 2000. "Quantal Response Equilibrium and Overbidding in Private-Value Auctions," Virginia Economics Online Papers 345, University of Virginia, Department of Economics.
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  24. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
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