Pricing Long-Lived Securities in Dynamic Endowment Economies

48 Pages Posted: 21 Apr 2017 Last revised: 19 May 2018

Jerry Tsai

University of Oxford - Department of Economics

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

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). 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

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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