Affine General Equilibrium Models
No-arbitrage models are extremely flexible modelling tools but often lack economic motivation. This paper describes an equilibrium consumption-based CAPM framework based on Epstein-Zin preferences, which produces analytic pricing formulas for stocks and bonds under the assumption that macro growth r...
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| Veröffentlicht in: | Management science 2008-12, Vol.54 (12), p.2068-2080 |
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| creator | Eraker, Bjorn |
| description | No-arbitrage models are extremely flexible modelling tools but often lack economic motivation. This paper describes an equilibrium consumption-based CAPM framework based on Epstein-Zin preferences, which produces analytic pricing formulas for stocks and bonds under the assumption that macro growth rates follow affine processes. This allows the construction of equilibrium pricing formulas while maintaining the same flexibility of state dynamics as in no-arbitrage models. In demonstrating the approach, the paper presents a model that incorporates inflation such that asset prices are nominal. The model takes advantage of the possibility of non-Gaussian shocks and model macroeconomic uncertainty as a jump-diffusion process. This leads to endogenous stock market crashes as stock prices drop to reflect a higher expected rate of return in response to sudden increases in risk. The nominal yield curve in this model has a positive slope if expected inflation growth negatively impacts real growth. This model also produces asset prices that are consistent with observed data, including a substantial equity premium at moderate levels of risk aversion. |
| doi_str_mv | 10.1287/mnsc.1070.0796 |
| format | Article |
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This paper describes an equilibrium consumption-based CAPM framework based on Epstein-Zin preferences, which produces analytic pricing formulas for stocks and bonds under the assumption that macro growth rates follow affine processes. This allows the construction of equilibrium pricing formulas while maintaining the same flexibility of state dynamics as in no-arbitrage models. In demonstrating the approach, the paper presents a model that incorporates inflation such that asset prices are nominal. The model takes advantage of the possibility of non-Gaussian shocks and model macroeconomic uncertainty as a jump-diffusion process. This leads to endogenous stock market crashes as stock prices drop to reflect a higher expected rate of return in response to sudden increases in risk. The nominal yield curve in this model has a positive slope if expected inflation growth negatively impacts real growth. 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Actuarial science ; stochastic model applications ; Stochastic models ; Stock exchange ; Stock prices ; Studies ; Uncertainty ; Yield curves</subject><ispartof>Management science, 2008-12, Vol.54 (12), p.2068-2080</ispartof><rights>Copyright 2008 INFORMS</rights><rights>2009 INIST-CNRS</rights><rights>COPYRIGHT 2008 Institute for Operations Research and the Management Sciences</rights><rights>Copyright Institute for Operations Research and the Management Sciences Dec 2008</rights><lds50>peer_reviewed</lds50><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c665t-27f557245ae4752fe80034ec680be77bec8e6fe09fe84ae3c0719f42086ca68c3</citedby><cites>FETCH-LOGICAL-c665t-27f557245ae4752fe80034ec680be77bec8e6fe09fe84ae3c0719f42086ca68c3</cites></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktopdf>$$Uhttps://www.jstor.org/stable/pdf/30219145$$EPDF$$P50$$Gjstor$$H</linktopdf><linktohtml>$$Uhttps://pubsonline.informs.org/doi/full/10.1287/mnsc.1070.0796$$EHTML$$P50$$Ginforms$$H</linktohtml><link.rule.ids>314,780,784,803,3692,4008,27924,27925,58017,58250,62616</link.rule.ids><backlink>$$Uhttp://pascal-francis.inist.fr/vibad/index.php?action=getRecordDetail&idt=20965554$$DView record in Pascal Francis$$Hfree_for_read</backlink><backlink>$$Uhttp://econpapers.repec.org/article/inmormnsc/v_3a54_3ay_3a2008_3ai_3a12_3ap_3a2068-2080.htm$$DView record in RePEc$$Hfree_for_read</backlink></links><search><creatorcontrib>Eraker, Bjorn</creatorcontrib><title>Affine General Equilibrium Models</title><title>Management science</title><description>No-arbitrage models are extremely flexible modelling tools but often lack economic motivation. This paper describes an equilibrium consumption-based CAPM framework based on Epstein-Zin preferences, which produces analytic pricing formulas for stocks and bonds under the assumption that macro growth rates follow affine processes. This allows the construction of equilibrium pricing formulas while maintaining the same flexibility of state dynamics as in no-arbitrage models. In demonstrating the approach, the paper presents a model that incorporates inflation such that asset prices are nominal. The model takes advantage of the possibility of non-Gaussian shocks and model macroeconomic uncertainty as a jump-diffusion process. This leads to endogenous stock market crashes as stock prices drop to reflect a higher expected rate of return in response to sudden increases in risk. The nominal yield curve in this model has a positive slope if expected inflation growth negatively impacts real growth. This model also produces asset prices that are consistent with observed data, including a substantial equity premium at moderate levels of risk aversion.</description><subject>Applied sciences</subject><subject>Arbitrage</subject><subject>Asset pricing</subject><subject>CAPM</subject><subject>Consumption</subject><subject>diffusion</subject><subject>Dividends</subject><subject>Economic models</subject><subject>Economics</subject><subject>Equilibrium</subject><subject>Equilibrium (Economics)</subject><subject>Exact sciences and technology</subject><subject>finance</subject><subject>General aspects</subject><subject>General economic equilibrium</subject><subject>General equilibrium model</subject><subject>Inflation</subject><subject>investment</subject><subject>Macroeconomic modeling</subject><subject>Macroeconomics</subject><subject>Operational research and scientific management</subject><subject>Operational research. Management science</subject><subject>Portfolio theory</subject><subject>Price shocks</subject><subject>Price volatility</subject><subject>Pricing</subject><subject>Probability</subject><subject>Risk aversion</subject><subject>Risk theory. Actuarial science</subject><subject>stochastic model applications</subject><subject>Stochastic models</subject><subject>Stock exchange</subject><subject>Stock prices</subject><subject>Studies</subject><subject>Uncertainty</subject><subject>Yield curves</subject><issn>0025-1909</issn><issn>1526-5501</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2008</creationdate><recordtype>article</recordtype><sourceid>X2L</sourceid><sourceid>ABUWG</sourceid><sourceid>AFKRA</sourceid><sourceid>AZQEC</sourceid><sourceid>BENPR</sourceid><sourceid>CCPQU</sourceid><sourceid>DWQXO</sourceid><sourceid>GNUQQ</sourceid><recordid>eNqFkd9rFEEMxxdR8Ky--iacgoIPe2Zm59c-HqVWoaUv9XmYm2bu5tgf15ndSv97s91ygkjLkAkkn4R8k6J4z2DFuNHf2i77FQMNK9C1elEsmOSqlBLYy2IBwGXJaqhfF29y3gOANlotio_rEGKHy3PsMLlmeXY7xiZuUhzb5WV_g01-W7wKrsn47tGfFL--n12f_igvrs5_nq4vSq-UHEqug5SaC-lQaMkDGoBKoFcGNqj1Br1BFRBqygiHlQfN6iA4GOWdMr46Kb7MfQ-pvx0xD7aN2WPTuA77MdtKgxLcAIGf_gH3_Zg6ms1yVjGtlZigcoa2rkEbu9APyfntrLLvMEQKr1nNZGWEqolf_Yend4Nt9E8V-NTnnDDYQ4qtS_eWgZ3uYad72OkedroHFVzOBQkP6I907No-PaB3tnJS0HdPxgEMuUjGOH2Hh5gylhYGdje01O_z4xpc9q4JyXU-5mNfDrWSUgriPszcPg99OuYr4CRGyL-bmkSnNj-v4-vM7-J29zumeVtTYeuIjJY00MjTsNUfL4LIaw</recordid><startdate>20081201</startdate><enddate>20081201</enddate><creator>Eraker, Bjorn</creator><general>INFORMS</general><general>Institute for Operations Research and the Management Sciences</general><scope>IQODW</scope><scope>DKI</scope><scope>X2L</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>3V.</scope><scope>7WY</scope><scope>7WZ</scope><scope>7X5</scope><scope>7XB</scope><scope>87Z</scope><scope>88C</scope><scope>88G</scope><scope>8A3</scope><scope>8AO</scope><scope>8BJ</scope><scope>8FI</scope><scope>8FJ</scope><scope>8FK</scope><scope>8FL</scope><scope>ABUWG</scope><scope>AFKRA</scope><scope>AZQEC</scope><scope>BENPR</scope><scope>BEZIV</scope><scope>CCPQU</scope><scope>DWQXO</scope><scope>FQK</scope><scope>FRNLG</scope><scope>FYUFA</scope><scope>F~G</scope><scope>GHDGH</scope><scope>GNUQQ</scope><scope>JBE</scope><scope>K60</scope><scope>K6~</scope><scope>L.-</scope><scope>M0C</scope><scope>M0T</scope><scope>M2M</scope><scope>PQBIZ</scope><scope>PQBZA</scope><scope>PQEST</scope><scope>PQQKQ</scope><scope>PQUKI</scope><scope>PSYQQ</scope><scope>Q9U</scope></search><sort><creationdate>20081201</creationdate><title>Affine General Equilibrium Models</title><author>Eraker, Bjorn</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c665t-27f557245ae4752fe80034ec680be77bec8e6fe09fe84ae3c0719f42086ca68c3</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2008</creationdate><topic>Applied sciences</topic><topic>Arbitrage</topic><topic>Asset pricing</topic><topic>CAPM</topic><topic>Consumption</topic><topic>diffusion</topic><topic>Dividends</topic><topic>Economic models</topic><topic>Economics</topic><topic>Equilibrium</topic><topic>Equilibrium (Economics)</topic><topic>Exact sciences and technology</topic><topic>finance</topic><topic>General aspects</topic><topic>General economic equilibrium</topic><topic>General equilibrium model</topic><topic>Inflation</topic><topic>investment</topic><topic>Macroeconomic modeling</topic><topic>Macroeconomics</topic><topic>Operational research and scientific management</topic><topic>Operational research. Management science</topic><topic>Portfolio theory</topic><topic>Price shocks</topic><topic>Price volatility</topic><topic>Pricing</topic><topic>Probability</topic><topic>Risk aversion</topic><topic>Risk theory. Actuarial science</topic><topic>stochastic model applications</topic><topic>Stochastic models</topic><topic>Stock exchange</topic><topic>Stock prices</topic><topic>Studies</topic><topic>Uncertainty</topic><topic>Yield curves</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Eraker, Bjorn</creatorcontrib><collection>Pascal-Francis</collection><collection>RePEc IDEAS</collection><collection>RePEc</collection><collection>CrossRef</collection><collection>ProQuest Central (Corporate)</collection><collection>Access via ABI/INFORM (ProQuest)</collection><collection>ABI/INFORM Global (PDF only)</collection><collection>Entrepreneurship Database</collection><collection>ProQuest Central (purchase pre-March 2016)</collection><collection>ABI/INFORM Global (Alumni Edition)</collection><collection>Healthcare Administration Database (Alumni)</collection><collection>Psychology Database (Alumni)</collection><collection>Entrepreneurship Database (Alumni Edition)</collection><collection>ProQuest Pharma Collection</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>Hospital Premium Collection</collection><collection>Hospital Premium Collection (Alumni Edition)</collection><collection>ProQuest Central (Alumni) (purchase pre-March 2016)</collection><collection>ABI/INFORM Collection (Alumni Edition)</collection><collection>ProQuest Central (Alumni Edition)</collection><collection>ProQuest Central UK/Ireland</collection><collection>ProQuest Central Essentials</collection><collection>ProQuest Central</collection><collection>Business Premium Collection</collection><collection>ProQuest One Community College</collection><collection>ProQuest Central Korea</collection><collection>International Bibliography of the Social Sciences</collection><collection>Business Premium Collection (Alumni)</collection><collection>Health Research Premium Collection</collection><collection>ABI/INFORM Global (Corporate)</collection><collection>Health Research Premium Collection (Alumni)</collection><collection>ProQuest Central Student</collection><collection>International Bibliography of the Social Sciences</collection><collection>ProQuest Business Collection (Alumni Edition)</collection><collection>ProQuest Business Collection</collection><collection>ABI/INFORM Professional Advanced</collection><collection>ABI/INFORM Global</collection><collection>Healthcare Administration Database</collection><collection>Psychology Database</collection><collection>ProQuest One Business</collection><collection>ProQuest One Business (Alumni)</collection><collection>ProQuest One Academic Eastern Edition (DO NOT USE)</collection><collection>ProQuest One Academic</collection><collection>ProQuest One Academic UKI Edition</collection><collection>ProQuest One Psychology</collection><collection>ProQuest Central Basic</collection><jtitle>Management science</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Eraker, Bjorn</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Affine General Equilibrium Models</atitle><jtitle>Management science</jtitle><date>2008-12-01</date><risdate>2008</risdate><volume>54</volume><issue>12</issue><spage>2068</spage><epage>2080</epage><pages>2068-2080</pages><issn>0025-1909</issn><eissn>1526-5501</eissn><coden>MSCIAM</coden><abstract>No-arbitrage models are extremely flexible modelling tools but often lack economic motivation. This paper describes an equilibrium consumption-based CAPM framework based on Epstein-Zin preferences, which produces analytic pricing formulas for stocks and bonds under the assumption that macro growth rates follow affine processes. This allows the construction of equilibrium pricing formulas while maintaining the same flexibility of state dynamics as in no-arbitrage models. In demonstrating the approach, the paper presents a model that incorporates inflation such that asset prices are nominal. The model takes advantage of the possibility of non-Gaussian shocks and model macroeconomic uncertainty as a jump-diffusion process. This leads to endogenous stock market crashes as stock prices drop to reflect a higher expected rate of return in response to sudden increases in risk. The nominal yield curve in this model has a positive slope if expected inflation growth negatively impacts real growth. This model also produces asset prices that are consistent with observed data, including a substantial equity premium at moderate levels of risk aversion.</abstract><cop>Hanover, MD</cop><pub>INFORMS</pub><doi>10.1287/mnsc.1070.0796</doi><tpages>13</tpages></addata></record> |
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| ispartof | Management science, 2008-12, Vol.54 (12), p.2068-2080 |
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| language | eng |
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| source | Informs; RePEc; EBSCOhost Business Source Complete; JSTOR Archive Collection A-Z Listing |
| subjects | Applied sciences Arbitrage Asset pricing CAPM Consumption diffusion Dividends Economic models Economics Equilibrium Equilibrium (Economics) Exact sciences and technology finance General aspects General economic equilibrium General equilibrium model Inflation investment Macroeconomic modeling Macroeconomics Operational research and scientific management Operational research. Management science Portfolio theory Price shocks Price volatility Pricing Probability Risk aversion Risk theory. Actuarial science stochastic model applications Stochastic models Stock exchange Stock prices Studies Uncertainty Yield curves |
| title | Affine General Equilibrium Models |
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