Pricing Long-Lived Securities in Dynamic Endowment Economies

Jerry Tsai and Jessica Wachter ()

No 24641, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our results clarify model properties governed by the elasticity of intertemporal substitution, by risk aversion, and by the preference for early resolution of uncertainty. Finally, we show in a general setting that the linear relation between normal-times covariances and expected returns need not hold in a model with rare events.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-knm, nep-mic and nep-upt
Note: TWP
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Citations: View citations in EconPapers (5)

Published as Jerry Tsai & Jessica A. Wachter, 2018. "Pricing long-lived securities in dynamic endowment economies," Journal of Economic Theory, vol 177, pages 848-878.

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