On Euler Equation Restrictions On the Temporal Behavior of Asset Returns
On Euler Equation Restrictions On the Temporal Behavior of Asset Returns
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] and E, IAU(. )] move together while Cov ^^[AU(. ) . Z. ] remains constant.
-20- Asset pricing model tests can be obtained from (17), which must hold across all assets i = 1, ... , N. Assuming, for simplicity, the existence of a riskless asset with rate of return Rp^. So that Ef_i [AU] = 1 + ^Vf> (18) implies the following restriction on asset risk premiums: Vi^^tJ - ht ^°Vi^^^'^it^ ^-if^jt^ - ^Ft " C°^-lf^"'^t^ Breeden and Litzenberger [1978] show that, in equilibrium, AU will be monotonic in... aggregate per capita consumption changes, and Bhattacharya [1979] points out that this will be true, in the limit of continuous time, whatever the form of the utility function for consumption.
When the intertemporal asset pricing model is stated as in (18), Marsh [1983] shows that the restriction in (18) cannot be rejected using default-free bond return data when it is applied to real returns and allowance is made for errors in observing the consumption variable.
Because (18) holds in continuous time when AU( ) is simply replaced by consumption changes, it follows that a researcher who attempts to substitute (say) an isoelastic specification in (5) or (18) will find that the resulting estimate of the relative risk aversion parameter y ^^Y well have more to do with the length of the differencing interval than with a sharply identified "true" value of y- Of course, if one sticks to a single asset as in (17), there will be one best estimate of y, but that best estimate will, roughly, be only as good as the best estimate of E ^^[AU], which is yet another potential explanation for the wide range of estimates of y reported in different studies.
What to read after On Euler Equation Restrictions On the Temporal Behavior of Asset Returns?
You can find similar books in the "Read Also" column, or choose other free books by Terry a Marsh to read onlineMoreLess
To quickly assess the difficulty of the text, read a short excerpt:
] and E, IAU(. )] move together while Cov ^^[AU(. ) . Z. ] remains constant.
-20- Asset pricing model tests can be obtained from (17), which must hold across all assets i = 1, ... , N. Assuming, for simplicity, the existence of a riskless asset with rate of return Rp^. So that Ef_i [AU] = 1 + ^Vf> (18) implies the following restriction on asset risk premiums: Vi^^tJ - ht ^°Vi^^^'^it^ ^-if^jt^ - ^Ft " C°^-lf^"'^t^ Breeden and Litzenberger [1978] show that, in equilibrium, AU will be monotonic in... aggregate per capita consumption changes, and Bhattacharya [1979] points out that this will be true, in the limit of continuous time, whatever the form of the utility function for consumption.
When the intertemporal asset pricing model is stated as in (18), Marsh [1983] shows that the restriction in (18) cannot be rejected using default-free bond return data when it is applied to real returns and allowance is made for errors in observing the consumption variable.
Because (18) holds in continuous time when AU( ) is simply replaced by consumption changes, it follows that a researcher who attempts to substitute (say) an isoelastic specification in (5) or (18) will find that the resulting estimate of the relative risk aversion parameter y ^^Y well have more to do with the length of the differencing interval than with a sharply identified "true" value of y- Of course, if one sticks to a single asset as in (17), there will be one best estimate of y, but that best estimate will, roughly, be only as good as the best estimate of E ^^[AU], which is yet another potential explanation for the wide range of estimates of y reported in different studies.
What to read after On Euler Equation Restrictions On the Temporal Behavior of Asset Returns?
You can find similar books in the "Read Also" column, or choose other free books by Terry a Marsh to read onlineMoreLess
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