Existence Conditions for Asset Pricing Models with Recursive Utility

54 Pages Posted: 8 Aug 2019 Last revised: 15 Feb 2022

See all articles by Walt Pohl

Walt Pohl

NHH Norwegian School of Economics; University of Zurich

Karl Schmedders

IMD Lausanne

Ole Wilms

University of Hamburg; Tilburg University - Tilburg University School of Economics and Management

Date Written: February 11, 2022

Abstract

Modern asset pricing models combine recursive preferences with complex dynamics for the underlying consumption process. Existence of solutions is, for many of these models, an unsettled question. This paper introduces a novel technique to prove existence and non-existence for models with recursive preferences. The approach applies to many models of interest, such as those with long-run consumption risks, with stochastic volatility and jumps, with volatility of volatility, with time-varying consumption disasters, and with smooth ambiguity aversion and learning. Collectively the proven results settle the existence question for many of today's leading asset pricing models.

Keywords: Asset pricing, existence, jumps, long-run risk, recursive utility

JEL Classification: G11, G12

Suggested Citation

Pohl, Walt and Pohl, Walt and Schmedders, Karl and Wilms, Ole, Existence Conditions for Asset Pricing Models with Recursive Utility (February 11, 2022). Available at SSRN: https://ssrn.com/abstract=3432469 or http://dx.doi.org/10.2139/ssrn.3432469

Walt Pohl

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

University of Zurich ( email )

Moussonstrasse 15
Z├╝rich, 8044
Switzerland

Karl Schmedders

IMD Lausanne ( email )

Lausanne, CH-1003
Switzerland
+41 (0)79 596 8956 (Phone)

Ole Wilms (Contact Author)

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

HOME PAGE: http://www.olewilms.com

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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