Pricing of the Time-Change Risks

Ivan Shaliastovich and George Tauchen ()

No 10-71, Working Papers from Duke University, Department of Economics

Abstract: We develop a discrete-time real endowment economy featuring recursive preferences and a L´evy 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, with closed-form analytical solutions for the asset prices. We show that the non-Gaussianity of fundamentals due to time-deformation induces risk compensations whidh depend on higher order moments of consumption and dividend series. Persistence of the activity shocks leads to predictability of the endowment streams and timevariation in asset prices and risk premia. In numerical calibrations, we show that the compensation for L´evy risks accounts for about one-third of the overall risk premium in the economy.

Keywords: Risk premium; time change; L´evy processes; recursive preferences (search for similar items in EconPapers)
JEL-codes: C51 D51 G12 (search for similar items in EconPapers)
Pages: 31
Date: 2009
References: Add references at CitEc
Citations:

Downloads: (external link)
http://papers.ssrn.com/abstract=1687963 main text

Related works:
Journal Article: Pricing of the time-change risks (2011)
Working Paper: Pricing of the Time-Change Risks (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:10-71

Access Statistics for this paper

More papers in Working Papers from Duke University, Department of Economics Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097.
Bibliographic data for series maintained by Department of Economics Webmaster ().