Pricing Long-Lived Securities in Dynamic Endowment Economies

49 Pages Posted: 30 May 2018

See all articles by Jerry Tsai

Jerry Tsai

Pacific Investment Management Company (PIMCO); University of Oxford - Department of Economics

Jessica A. Wachter

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

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Date Written: May 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 relation between normal-times covariances and expected returns need not hold in a model with rare events.

Suggested Citation

Tsai, Jerry and Wachter, Jessica A., Pricing Long-Lived Securities in Dynamic Endowment Economies (May 2018). NBER Working Paper No. w24641, Available at SSRN: https://ssrn.com/abstract=3185895

Jerry Tsai (Contact Author)

Pacific Investment Management Company (PIMCO) ( email )

United States

University of Oxford - Department of Economics ( email )

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Manor Road
Oxford, OX1 3UQ
United Kingdom

Jessica A. Wachter

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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