Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

Aldrich, E M and Kung, H (2019) Computational Methods for Production-Based Asset Pricing Models with Recursive Utility. Studies in Nonlinear Dynamics and Econometrics. ISSN 1558-3708 (In Press)

Abstract

We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which affect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

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Item Type: Article
Subject Areas: Finance
Additional Information:

© 2020 Walter de Gruyter GmbH

Subjects: P > Pricing
A > Assets
N > Nonlinear programming
Date Deposited: 29 Jan 2020 15:26
Last Modified: 11 Feb 2020 11:40
URI: http://lbsresearch.london.edu/id/eprint/1347
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