Approximate Equilibrium Asset Prices

Restoy, Fernando; Weil, Philippe

doi:10.3386/w6611

Cited by 48 publications

(33 citation statements)

References 8 publications

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“…For example, if the EIS is restricted to unity and consumption follows a loglinear vector time-series process, the continuation value has an analytical solution and is a function of observable consumption data (e.g., Hansen, Heaton, and Li (2008)). Alternatively, if consumption and asset returns are assumed to be jointly log-normally distributed and homoskedastic (e.g., Attanasio and Weber (1989)) or if a second-order linearization is applied to the Euler equation, the risk premium of any asset can be expressed as a function of covariances of the asset's return with current consumption growth and with news about future consumption growth (e.g., Restoy and Weil (1998), Campbell (2003)). In this case, the model's cross-sectional asset pricing implications can be evaluated using observable consumption data and a model for expectations of future consumption.…”

Section: Introductionmentioning

confidence: 99%

An estimation of economic models with recursive preferences

Chen

Favilukis

Ludvigson

2013

Quantitative Economics

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This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model‐implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value‐weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

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Section: Introductionmentioning

confidence: 99%

An estimation of economic models with recursive preferences

Chen

Favilukis

Ludvigson

2013

Quantitative Economics

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“…The recent empirical success of long‐run consumption measures has prompted asset pricing models that feature long‐run risks. One set of models includes variations of the recursive utility framework of Kreps and Porteus (1978) and Restoy and Weil (1998), which allows for the separation of the elasticity of intertemporal substitution (EIS) from risk aversion. Epstein and Zin (1989), Weil (1989), Bansal and Yaron (2004), and Hansen et al (2008), for example, introduce models that feature a role for future consumption.…”

mentioning

confidence: 99%

Long‐Run Stockholder Consumption Risk and Asset Returns

MALLOY,

MOSKOWITZ,

VISSING‐JØRGENSEN

2009

The Journal of Finance

316

179

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We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by "stockholders". Exploiting microlevel household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or nonstockholder consumption risk, and implies more plausible risk aversion estimates. We find that risk aversion around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks. Copyright (c) 2009 the American Finance Association.

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“…One would expect that regime switches in the volatility of all shocks lead to variation in risk premia. In the model, however, variations in risk premia must be associated with uncertainty about revisions in the rate of growth of future utility and with their correlations with inflation and with the marginal utility of consumptionsee also Restoy and Weil (2011) and Piazzesi and Schneider (2006). The key source of quantitatively sizable time-variation in risk premia are switches in the variance of technology shocks.…”

Section: Monetary Policy and Risk Premiamentioning

confidence: 99%

Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates

Amisano¹,

Tristani²

2019

FEDS

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We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in inflation expectations induced by conventional, autoregressive shocks. Long-term inflation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less strongly anchored in the 2000s. * An older version of this paper was circulated with the title "A DSGE model of the term structure with regime switches". We thank for useful comments and suggestions:

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Approximate Equilibrium Asset Prices

Cited by 48 publications

References 8 publications

An estimation of economic models with recursive preferences

An estimation of economic models with recursive preferences

Long‐Run Stockholder Consumption Risk and Asset Returns

Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates

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