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Recursive utility and the equity premium puzzle: A discrete-time approach

Aase, Knut K.
Working paper
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URI
http://hdl.handle.net/11250/164153
Date
2013-05
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  • Discussion papers (FOR) [556]
Abstract
We study the Epstein-Zin model with recursive utility. Recognizing that recursive preferences implies that the underlying model is not

Markovian, we use methods not depending upon the Markov property

to solve the model. We work with the returns directly, which we

approximate by Taylor series expansions, in log terms. Leaving out

moments of order three and higher, we calibrate the resulting model

to the data of Mehra and Prescott (1985) under various assumptions

about the wealth portfolio. The results are very reasonable for the

US-data. We also calibrate to a newer Norwegian data set, where

we also have the relevant estimates for the national wealth portfolio.

Again, the results are consistent with plausible values for the prefer-

ence parameters.
Publisher
Norwegian School of Economics and Business Administration. Department of Business and Management Science
Series
Discussion papers;2013/03

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