Minimal Dynamic Equilibria
18 Pages Posted: 28 Mar 2018 Last revised: 1 Jul 2021
Date Written: June 1, 2021
We define dynamic models as multiperiod models with no static representations and demonstrate that current prevalent asset pricing empirical implementations are inconsistent with dynamic equilibria. Specifically, empirical implementations are misspecified with respect to three essential asset pricing questions (TEQ): dependency on higher moments, complexity of risk premia, and mean-variance efficiency of the “market portfolio” (ability to proxy pricing kernels/SDFs). While we already know that “Merton” models, and their derivatives, differ from static models in all TEQ, we show that this is the case even the “minimal” dynamic equilibria.
Keywords: Minimal, Dynamic, Equilibrium, Higher Moments, Risk Premium, Pricing Kernel, SDF
JEL Classification: G12, G11
Suggested Citation: Suggested Citation