ON THE ECONOMIC IMPACT OF MODELING NONLINEARITIES: THE ASSET PRICING EXAMPLE

Prasad Bidarkota ()

Macroeconomic Dynamics, 2006, vol. 10, issue 1, 56-76

Abstract: We investigate the economic importance of modeling nonlinearities 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 nonlinear threshold autoregression. The asset pricing model with nonlinear 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 nonlinearities is small.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:10:y:2006:i:01:p:56-76_05

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