25 Pages Posted: 21 Mar 2011
Date Written: August 1, 2007
This paper examines an equilibrium asset pricing model with Epstein-Zin preferences in which the beliefs about the fundamentals in the Macroeconomy are time varying. A vector autoregression with time varying parameters and stochastic volatilities of consumption growth and inflation is estimated using an MCMC algorithm. The model generates time-varying countercyclical market prices of risk and is able to match broad movements in short and long nominal bond yields.
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