Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

45 Pages Posted: 26 Sep 2009 Last revised: 10 May 2017

See all articles by Eric M. Aldrich

Eric M. Aldrich

University of California, Santa Cruz

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 23, 2017

Abstract

We compare local and global polynomial solution methods for DSGE models with Epstein-Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Keywords: DSGE Models, Nonlinear Solution Methods, Numerical Dynamic Programming, Recursive Utility, Asset Pricing.

JEL Classification: C63, C68, D53, E44, G12

Suggested Citation

Aldrich, Eric Mark and Kung, Howard, Computational Methods for Production-Based Asset Pricing Models with Recursive Utility (January 23, 2017). Available at SSRN: https://ssrn.com/abstract=1478598 or http://dx.doi.org/10.2139/ssrn.1478598

Eric Mark Aldrich (Contact Author)

University of California, Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-4247 (Phone)

HOME PAGE: http://ealdrich.com

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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