Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and...

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Veröffentlicht in:	Studies in nonlinear dynamics and econometrics 2021-02, Vol.25 (1), p.1-26
Hauptverfasser:	Aldrich, Eric Mark, Kung, Howard
Format:	Artikel
Sprache:	eng
Schlagworte:	Asset pricing Assets DSGE models Macroeconomics nonlinear solution methods numerical dynamic programming Parameter sensitivity Polynomials Prices Pricing Pricing policies Production methods recursive utility Volatility Welfare
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creator	Aldrich, Eric Mark Kung, Howard
description	We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which affect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.
doi_str_mv	10.1515/snde-2017-0003
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subjects	Asset pricing Assets DSGE models Macroeconomics nonlinear solution methods numerical dynamic programming Parameter sensitivity Polynomials Prices Pricing Pricing policies Production methods recursive utility Volatility Welfare
title	Computational Methods for Production-Based Asset Pricing Models with Recursive Utility
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