Endogenous discounting, investment and asset pricing

Abstract

We extend an equilibrium business cycle/asset pricing model of production and capital accumulation by introducing wealth-dependent time preferences.First, we find that the aggregate consumption is no longer proportional to the output and the consumption volatility is always lower than the volatility of output. Second, the expected real growth rate is increasing in the capital stock, which leads to a twin-peak shape of the world wealth distribution as shown in the data. With respect to financial markets, we show that the equity risk premium is reduced by the endogenous discounting and exhibits a cyclical pattern, which depends on the capital stock. Finally, time-varying discount rate leads to welfare improvement and the welfare gain is decreasing in the capital stock.

Simulation analysis of asset pricing based on the Gaussian process

“…From the expression of the option price, we obtain the distribution 𝑝 𝑇 (1) , 𝑝 𝑇 (2) ⋯ 𝑝 𝑇 (𝑁) and the profit and loss distribution 𝑝 𝑇 (1) , 𝑝 𝑇 (2) ⋯ 𝑝 𝑇 (𝑁) of the American option price, and from the profit and loss distribution, we obtain the value at risk at confidence level 𝑐.…”

“…The evolution and development of asset pricing theories and models have irreplaceably influenced macroeconomic operations and decisions and have substantially affected investors' investment strategies and the operation of capital markets [1]- [2]. Asset pricing theories have been divided into two categories depending on the assumed contextual framework: asset pricing theories of rational expectations and asset pricing theories of irrational expectations [3].…”