Asset pricing in a production economy with Chew–Dekel preferences

Castro, Rui; Campanale, Claudio; Clementi, Gian Luca

doi:10.1016/j.red.2009.06.005

Cited by 93 publications

(60 citation statements)

References 49 publications

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“…Our paper is also related to the growing literature examining asset pricing in production-based general equilibrium models with recursive preferences (Ai (2009) ;Backus, Routledge, and Zin (2010) ;Campanale, Castro, and Clementi (2008); Gourio (2011);Lochstoer and Kaltenbrunner (2010); Kuehn (2008) ;Kuehn, Petrosky-Nadeau, and Zang (2011)). In the spirit of the existing literature, we provide a handy production economy able to produce sizeable Sharpe ratios and equity premia.…”

Section: Introductionmentioning

confidence: 88%

Fiscal Policies and Asset Prices

Croce¹,

et al. 2012

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The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: (1) distorting profits and investment; (2) reducing the cost of debt through a tax shield; and (3) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia, making tax uncertainty a first-order concern. We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks. AbstractThe surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: i) distorting profits and investment; ii) reducing the cost of debt through a tax shield; and iii) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia making tax uncertainty a first order concern.We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks.

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Section: Introductionmentioning

confidence: 88%

Fiscal Policies and Asset Prices

Croce¹,

et al. 2012

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“…As shown in the second column of Table II, in the calibrated model the target Sharpe ratio of 0.25 is attained with a moderately high risk aversion of 6. Clearly, a given Sharpe ratio can be generated by many different combinations of equity 9 The data are taken from Campbell (1999). The stock return and the risk-free rate are calculated from Standard and Poor's 500 index and the six-month commercial paper rate (bought in January and rolled over in July), respectively.…”

Section: The Unconditional Moments Of Asset Pricesmentioning

confidence: 99%

A Parsimonious Macroeconomic Model for Asset Pricing

Guvenen¹

2009

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In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders' aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.

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“…Methodologically, our paper is closely related to Jermann (1998), who finds that the combination of capital adjustment costs and habit preferences can generate a low risk-free rate, a high equity premium, high volatility of excess returns, and high relative investment and low consumption volatility. More recently, Campanale, Castro, and Clementi (2010) show that a production economy with convex capital adjustment costs and disappointment aversion can produce a high equity premium as well.…”

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confidence: 99%

Asset Pricing in Production Economies with Extrapolative Expectations

Hirshleifer

Li²,

2012

SSRN Journal

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Introducing extrapolation bias into a standard one-sector production-based real business cycle model with recursive preferences reconciles salient stylized facts about business cycles (low consumption volatility and high investment volatility relative to output) and financial markets (high equity premium, volatile stock returns, and a low and smooth riskfree rate) with low relative risk aversion and an intertemporal elasticity of substitution in preferences of greater than one. Furthermore, the model matches several conditional stylized facts, such as return predictability based upon dividend yield, Q, and investment rates. These successes derive from the interaction of capital adjustment costs, extrapolative bias, and recursive preferences. Extrapolative bias increases the variation in the wealth-consumption ratio; recursive preferences cause this variation to be strongly priced; and adjustment costs decrease the covariance between marginal utility of consumption and asset returns. We provide empirical support for the mechanism of the model. JEL Classification: G02, G12, G14, E30

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Asset pricing in a production economy with Chew–Dekel preferences

Cited by 93 publications

References 49 publications

Fiscal Policies and Asset Prices

Fiscal Policies and Asset Prices

A Parsimonious Macroeconomic Model for Asset Pricing

Asset Pricing in Production Economies with Extrapolative Expectations

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