Recursive utility and the equity premium puzzle: A discrete-time approach

Knut Aase

No 2013/3, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We study the recursive model of Epstein and Zin. We use directional derivatives to derive the model, and calibrate to the data of Mehra and Prescott (1985). By assuming that we can view income streams as dividends of some shadow asset, the model is valid if the market portfolio is expanded to include the new asset. Since the latter is not traded, the return to the wealth portfolio is not readily observable or estimable from available data. We demonstrate that we can get a good impression of how the model fares, by calibrating under various assumptions. As the return on the wealth portfolio decreases, the estimated impatience rate decreases to reasonable values, while the risk aversion and the EIS parameter estimates are both plausible. The results are promising for the recursive model.

Keywords: Recursive utility; the Epstein-Zin model; utility gradients; calibrations (search for similar items in EconPapers)
JEL-codes: D51 D53 D90 E21 G10 G12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2013-05-15, Revised 2015-03-25
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:hhs:nhhfms:2013_003

Access Statistics for this paper

More papers in Discussion Papers from Norwegian School of Economics, Department of Business and Management Science NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Stein Fossen ().