Pricing long-lived securities in dynamic endowment economies

Jerry Tsai and Jessica A. Wachter

Journal of Economic Theory, 2018, vol. 177, issue C, 848-878

Abstract: We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our results clarify model properties governed by the elasticity of intertemporal substitution, by risk aversion, and by the preference for early resolution of uncertainty. Finally, we show in a general setting that the linear relation between normal-times covariances and expected returns need not hold in a model with rare events.

Keywords: Rare events; Jump diffusion; Recursive utility (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:177:y:2018:i:c:p:848-878

DOI: 10.1016/j.jet.2018.07.008

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