Statistical Estimation and Moment Evaluation of a Stochastic Growth Model with Asset Market Restrictions

Posted: 23 Sep 2001

See all articles by Martin Lettau

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Gang Gong

Tsinghua University - School of Economics & Management; University of Bielefeld

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Abstract

This paper estimates the parameters of a stochastic growth model with asset market and contrasts the model's moments with moments of the actual data. We solve the model through log-linearization along the line of Campbell (1994) [Journal of Monetary Economics 33(3), 463] and estimate the model without and with asset pricing restrictions. As asset pricing restrictions we employ the riskfree interest rate and the Sharpe-ratio. To estimate the parameters we employ, as in Semmler and Gong (1996a) [Journal of Economics Behavior and Organization 30, 301], a ML estimation. The estimation is conducted through the simulated annealing. We introduce a diagnostic procedure which is closely related to Watson (1993) [Journal of Political Economy 101(6), 1011] and Diebold et al. (1995) [Technical Working Paper No. 174, National Burea of Economic Research] to test whether the second moments of the actual macroeconomic time series data are matched by the model's time series. Several models are explored. The overall results are that sensible parameter estimates may be obtained when the actual and computed riskfree rate is included in the moments to be matched. The attempt, however, to include the Sharpe-ratio as restriction in the estimation does not produce sensible estimates. The paper thus shows, by employing statistical estimation techniques, that the baseline real business cycle (RBC) model is not likely to give correct predictions on asset market pricing when parameters are estimated from actual time series data.

JEL Classification: C13; C15; C61; E32; G1; G12

Keyword(s): Stochastic growth model, Sharpe-ratio, Maximum likelihood

JEL Classification: C13, C15, C61, E32, G1, G12

Suggested Citation

Lettau, Martin and Gong, Gang and Semmler, Willi, Statistical Estimation and Moment Evaluation of a Stochastic Growth Model with Asset Market Restrictions. Economic Behavior & Organization, Vol. 44, No. 1, January 1, 2001. Available at SSRN: https://ssrn.com/abstract=251487

Martin Lettau (Contact Author)

University of California - Haas School of Business ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
5106436349 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/lettau/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gang Gong

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

University of Bielefeld

Universitätsstraße 25
Bielefeld, NRW
Germany

Willi Semmler

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universitätsstraße 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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