Pricing of the Time-Change Risks

Ivan Shaliastovich and George Tauchen ()

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

Abstract: We develop a discrete-time real endowment economy featuring Epstein-Zin recursive utility and a Levy time-change subordinator, which represents a clock that connects business time to calendar time. This setup provides a convenient equilibrium framework for pricing non-Gaussian risks, where the solutions for financial prices are available up to integral operations in general, or in closed-form for tempered stable shocks. The non-Gaussianity of fundamentals due to time-deformation induces compensations for higher order moments and co-moments of consumption and dividend growth rates of the assets. Forecastability of the time change leads to predictability of the endowment streams and therefore to time-variation in financial prices and risk premia on assets. In numerical calibrations, we quantitatively analyze the compensations for different types of systematic risk.

Keywords: Risk premium; time change; Levy processes; recursive preferences (search for similar items in EconPapers)
JEL-codes: C51 D51 G12 (search for similar items in EconPapers)
Pages: 41
Date: 2010
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Related works:
Journal Article: Pricing of the time-change risks (2011)
Working Paper: Pricing of the Time-Change Risks (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-10

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