Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

Eric Aldrich () and Howard Kung

No 10-90, Working Papers from Duke University, Department of Economics

Abstract: We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improve- ments for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Keywords: DSGE Models; Nonlinear Solution Methods; Numerical Dynamic Program- ming; Recursive Utility; Asset Pricing (search for similar items in EconPapers)
JEL-codes: C63 C68 D53 E44 G12 (search for similar items in EconPapers)
Pages: 47
Date: 2010
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-90

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