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Recursive utility and disappearing puzzles for continuous-time models

Aase, Knut K.
Working paper
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0213.pdf (457.9Kb)
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http://hdl.handle.net/11250/164151
Utgivelsesdato
2013-05
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  • Discussion papers (FOR) [514]
Sammendrag
Motivated by the problems of the conventional model in rational-

izing market data, we derive the equilibrium interest rate and risk

premiums using recursive utility in a continuous time model. Two

ordinally equivalent versions are considered. The state price is not

Markov in any of the versions, so instead of using dynamic programming we use the stochastic maximum principle. The resulting equilibriums are consistent with low values of the parameters of the utility

functions when calibrated to market data. One version is consistent

with preference for early resolution of uncertainty, the other for late

for the US-data. We therefore consider heterogeneity with recursive

utilities. Our resulting model rationalize data well, and can explain

both the Equity Premium Puzzle and the Risk-Free Rate Puzzle with

good margins.
Utgiver
Norwegian School of Economics and Business Administration. Department of Business and Management Science
Serie
Discussion papers;2013/02

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