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Abstract:
This paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agent's coefficient of relative risk aversion to vary with the underlying economy's growth rate. Existence of equilibrium is proved and its asymptotic properties analyzed. This generalization leads to level dependent marginal rates of substitution, a property that sharply distinguishes this model from the standard construct. For very low coefficients of relative risk aversion, the equilibrium risk free and risky security returns are demonstrated to have volatilities and an associated equity premium that substantially exceed what is found in the data. This provides a contrasting perspective on the classic "equity premium puzzle."

state dependent utility, equity premium, equity premium puzzle

Abstract:
This Paper introduces state dependent utility into the standard Mehra and Prescott (1985) economy by allowing the representative agent's coefficient of relative risk aversion to vary with the underlying economy's growth rate. Existence of equilibrium is proved and its asymptotic properties analysed. This generalization leads to level dependent marginal rates of substitution, a property that sharply distinguishes this model from the standard construct. For very low coefficients of relative risk aversion, the equilibrium risk free and risky security returns are demonstrated to have volatilities and an associated equity premium that substantially exceed what is found in the data. This provides a contrasting perspective on the classic 'equity premium puzzle.'

State dependent utility, equity premium, equity premium puzzle

Abstract:
An agent optimizes over real investment and investment in information acquisition while maximizing a two-period utility that captures his ordinal certainty equivalent (OCE) preferences. Optimal investment is characterized and the impact of risk and time preferences on it is investigated.

Information, Ordinal Certainty Equivalent Preferences, Risk Aversion

Abstract:
This paper investigates asset pricing in a three-period overlapping generations (OLG) model economy where each generation lives as young, middle-aged and old. There is one perishable consumption good in the economy and two types of traded securities in the capital market: a bond and a share of equity. Implications for asset pricing and security returns of an increasing risk aversion are explored by allowing each agent's coefficient of relative risk aversion to vary with his age; the middle-aged consumer has a higher aversion to risk than the young and the old consumers are more risk averse than the middle-aged ones. Our model produces high equity premium without requiring very large levels of consumer risk aversion; a result more consistent with the U.S. data. We further modify our model to reflect the U.S. demographic trend of an increasing share of older age group. This new specification generates an even higher equity premium and a lower risk-free rate of return with an added desirable result of a lower standard deviation for the risk premium.

Asset Pricing, Equity Premium, Risk Aversion, Overlapping Generations

Abstract:
Unless extreme forms of rigidity are allowed, standard Real Business Cycle models are well known to generate counterfactual asset pricing implications. This paper seeks to circumvent all such rigidities by providing a simple extension to the prior literature, where we study an economy that switches between booms and busts, in conjunction with Epstein-Zin preferences for the consumers.

We first provide a detailed theoretical and numerical analysis on the model's predictions. Then, we show that a reasonable parametrization of our "rigidity-free'' model conveys plausible financial figures that are in line with empirical observations over the U.S. postwar economy.

Abstract:
A consistent test based on sample extreme value is proposed for the ARCH parameter in a simple ARCH model. The rate of convergence of the power function of the test is not uniform and is faster than that of the root-N asymptotic in the part of the power function further away from the null. When the test is specialized to test for the presence of ARCH, its power is found to be higher than that of the standard LM test when the innovation term in the ARCH has a t-distribution.

ARCH, statistical test, extreme value

Abstract:
We introduce habit-formation in the three-period OLG borrowing-constraint framework of Constantinides, Donaldson, and Mehra (2002) by allowing the utility of the middle-aged (old) to depend on consumption when young (middle-aged). This specification enables us to separate the effect of the two habit parameters (middle-aged and old) since each representative age-group can face different levels of habit persistence. The two-habit setup underlines some important issues with regards to savings and security returns which do not always conform to the standard findings in the literature. In addition, the model produces equity premium consistent with U.S. data for relatively small levels of risk aversion.

Equity premium puzzle, Overlapping generations model, Habit formation, Risk aversion

Abstract:
The ability of monetary policy to affect long-term interest rates is of central importance for economics and finance. Several recent studies have shown that long-term interest rates are virtually unaffected by monetary policy. This paper develops a statistical methodology to identify the expected and unexpected changes in monetary policy as measured by the federal funds rate. The empirical evidence shows that expected changes in the funds rate cause stronger and more significant movements in the long-term rates. Further, ignoring such asymmetry can erroneously generate the insignificant responses of long-term interest rates to the changes in the monetary policy.

long-term interest rate, monetary policy, asymmetry

Abstract:
The US housing market has experienced significant cyclical volatility over the last twenty-five years due to major structural changes and economic fluctuations. In addition, the housing market is generally considered to be weak form inefficient. Houses are relatively illiquid, exceptionally heterogeneous, and are associated with large transactions costs. As such, past research has shown that it is possible to predict, at least partially, the time path of housing prices. The ability to predict housing prices is important such that investors can make better asset allocation decisions, including the pricing and underwriting of mortgages. Most of the prior studies examining the US housing market have employed constant coefficent approaches to forecast house price movements. However, this approach is not optimal as an examination of data reveals substantial sub-sample parameter instability. To account for the parameter instability, we employ alternative estimation methodologies where the estimated parameters are allowed to vary over time. The results provide strong empirical evidence in favor of utilizing the rolling Generalized Autoregressive Conditional Heteroskedastic (GARCH) Model and the Kalman Filter with an Autoregressive Presentation (KAR) for the parameters' time variation. Lastly, we provide out-of-sample forecasts and demonstrate the precision of our approach.