Asset Pricing with Delayed Consumption Decisions

Willi Semmler and Lars Grüne

No 59, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: The attempt to match characteristics of asset pricing models such as the risk-free interest rate, equity premium and the Sharpe ratio for models with instantaneous consumption decisions in the context of stochastic growth models has not been very successful. Many recent versions of asset pricing models have, in order to match those financial characteristics better with the data, employed habit formation models where there is a delay in consumption decisions. Yet the results of those studies may depend on the solution techniques employed to solve the stochastic dynamic optimization model. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the above mentioned asset price characteristics with delayed consumption decisions, where the delayed consumption decision is treated as an additional state variable of the model. Since our method produces only negligible errors it is suitable to be used as solution technique for elaborate stochastic growth models with a delayed decision structure.

Keywords: stochastic growth; habit formation; stochastic DP; adaptive grid; asset pricing (search for similar items in EconPapers)
JEL-codes: C C61 C63 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://repec.org/sce2004/up.23407.1076778817.pdf (application/pdf)

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:sce:scecf4:59

Access Statistics for this paper

More papers in Computing in Economics and Finance 2004 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().