On the Economic Impact of Modeling Non-Linearities: The Asset Pricing Example

Prasad V. Bidarkota ()

No 305, Working Papers from Florida International University, Department of Economics

Abstract: We investigate the economic importance of modeling non-linearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a non-linear threshold autoregression. The asset pricing model with non-linear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling non-linearities is less than 0.01 percent per annum.

Keywords: asset pricing; rates of return; non-linearities; threshold autoregressions; numerical solutions (search for similar items in EconPapers)
JEL-codes: G12 C22 C52 C63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
Date: 2003-11
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Forthcoming in Macroeconomic Dynamics

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http://www.fiu.edu/orgs/economics/wp2003/03-05.pdf First version, 2003 (application/pdf)

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Persistent link: http://EconPapers.repec.org/RePEc:fiu:wpaper:0305

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