Pricing Long-Lived Securities in Dynamic Endowment Economies

48 Pages Posted: 21 Apr 2017 Last revised: 11 Aug 2020

See all articles by Jerry Tsai

Jerry Tsai

University of Oxford - Department of Economics; affiliation not provided to SSRN

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

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Date Written: May 16, 2018

Abstract

We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our results clarify model properties governed by the elasticity of intertemporal substitution, by risk aversion, and by the preference for early resolution of uncertainty. Finally, we show in a general setting that the linear relationbetween normal-times covariances and expected returns need not hold in a model with rare events.

Keywords: rare events, recursive utility, factor models

JEL Classification: G12

Suggested Citation

Tsai, Jerry and Wachter, Jessica A., Pricing Long-Lived Securities in Dynamic Endowment Economies (May 16, 2018). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2955337 or http://dx.doi.org/10.2139/ssrn.2955337

Jerry Tsai

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3UQ
United Kingdom

affiliation not provided to SSRN

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
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National Bureau of Economic Research (NBER)

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Securities and Exchange Commission ( email )

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United States

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