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

Aldrich Eric Mark () and Kung Howard
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Aldrich Eric Mark: University of California Santa Cruz, Economics, 1156 High St., Santa Cruz, CA, USA
Kung Howard: London Business School, Department of Finance, London, United Kingdom of Great Britain and NorthernIreland

Studies in Nonlinear Dynamics & Econometrics, 2021, vol. 25, issue 1, 26

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 improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which affect 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: asset pricing; DSGE models; nonlinear solution methods; numerical dynamic programming; recursive utility (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1515/snde-2017-0003

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