Asset Pricing Models with Preference Shocks: Existence and Uniqueness

40 Pages Posted: 28 Mar 2022 Last revised: 20 May 2022

See all articles by John Stachurski

John Stachurski

Australian National University (ANU) - Research School of Economics

Ole Wilms

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

Junnan Zhang

Xiamen University

Date Written: February 22, 2022

Abstract

This paper studies existence and uniqueness of recursive utility in asset pricing models with preference shocks. We provide conditions that clarify existence and uniqueness for a wide range of models, including exact necessary and sufficient conditions for standard formulations. The conditions isolate the roles of preference parameters, as well as the different risks that drive the consumption and preference shock processes. We show that existence crucially depends on the intertemporal elasticity of substitution of the investor. Even slight changes in the IES can turn a model with a well-defined solution into one where no solution exists.

Keywords: Asset pricing, recursive preferences, preference shocks, Epstein-Zin preferences, long-run risk

JEL Classification: D81, G11

Suggested Citation

Stachurski, John and Wilms, Ole and Zhang, Junnan, Asset Pricing Models with Preference Shocks: Existence and Uniqueness (February 22, 2022). Available at SSRN: https://ssrn.com/abstract=4041393 or http://dx.doi.org/10.2139/ssrn.4041393

John Stachurski

Australian National University (ANU) - Research School of Economics ( email )

Canberra
Australia

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

Junnan Zhang

Xiamen University ( email )

Xiamen, Fujian 361005
China

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