Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099495 | Journal of Economic Dynamics and Control | 2011 | 16 Pages |
Abstract
We develop an equilibrium endowment economy with Epstein-Zin recursive utility and a Lévy time-change subordinator, which represents a clock that connects business and calendar time. Our setup provides a tractable equilibrium framework for pricing non-Gaussian jump-like risks induced by the time-change, with closed-form solutions for asset prices. Persistence of the time-change shocks leads to predictability of consumption and dividends and time-variation in asset prices and risk premia in calendar time. In numerical calibrations, we show that the risk compensation for Lévy risks accounts for about one-third of the overall equity premium.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Ivan Shaliastovich, George Tauchen,