Solving non-linear stochastic models by parameterizing expectations: An application to asset pricing with production
A new algorithm called the parameterized expectations approach (PEA) for solving dynamic stochastic models under rational expectations is developed and its advantages and disadvantages are discussed. This algorithm can, in principle, approximate the true equilibrium arbitrarily well. Also, this algorithm works from the Euler equations, so that the equilibrium does not have to be cast in the form of a planner's problem. Monte--Carlo integration and the absence of grids on the state variables, cause the computation costs not to go up exponentially when the number of state variables or the exogenous shocks in the economy increase. \\ As an application we analyze an asset pricing model with endogenous production. We analyze its implications for time dependence of volatility of stock returns and the term structure of interest rates. We argue that this model can generate hump--shaped term structures.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fair, Ray C & Taylor, John B, 1983.
"Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models,"
Econometric Society, vol. 51(4), pages 1169-1185, July.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
- Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
- Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
- David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers 665, Queen's University, Department of Economics.
- Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
- Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, vol. 59(4), pages 1091-1104, July.
- Wilbur John Coleman, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.