Asset Pricing in a Production Economy with Chew-Dekel Preferences

Claudio Campanale, Rui Luís de Castro () and Gian Luca Clementi ()
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Claudio Campanale: Universidad de Alicante

Review of Economic Dynamics

Abstract: In this paper we provide a thorough characterization of the asset returns implied by a simple general equilibrium production economy with Chew-Dekel risk preferences and convex capital adjustment costs. When households display levels of disappointment aversion consistent with the experimental evidence, a version of the model parameterized to match the volatility of output and consumption growth generates unconditional expected asset returns and price of risk in line with the historical data. For the model with Epstein--Zin preferences to generate similar statistics, the relative risk aversion coefficient needs to be about 55, two orders of magnitude higher than the available estimates. We argue that this is not surprising, given the limited risk imposed on agents by a reasonably calibrated stochastic growth model. (Copyright: Elsevier)

Keywords: Disappointment aversion; First-order risk aversion; Epstein-Zin; Market price of risk; Equity premium; Business cycle (search for similar items in EconPapers)
JEL-codes: D81 E32 E43 E44 G12 (search for similar items in EconPapers)
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http://dx.doi.org/10.1016/j.red.2009.06.005
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Related works:
Working Paper: Asset Pricing in a Production Economy with Chew-Dekel Preferences (2007)
Working Paper: Asset Pricing in a Production Economy with ChewÐDekel Preferences (2007)
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