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Dynamic equilibrium with rare events and heterogeneous Epstein-Zin investors

Chabakauri, Georgy (2015) Dynamic equilibrium with rare events and heterogeneous Epstein-Zin investors. Working papers. Social Science Research Network (SSRN), Rochester, USA.

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Abstract

We consider a general equilibrium Lucas (1978) economy with one consumption good and two heterogeneous Epstein-Zin investors. The output is subject to rare large drops or, more generally, can have non-lognormal distribution with higher cumulants. The heterogeneity in preferences generates excess stock return volatilities, procyclical price-dividend ratios and interest rates, and countercyclical market prices of risk when the elasticity of intertemporal substitution (EIS) is greater than one. Moreover, the latter results cannot be jointly replicated in a model where investors have EIS_ 1 or CRRA preferences. We propose new approach for deriving equilibrium, and extend the analysis to the case of heterogeneous beliefs about probabilities of rare events.

Item Type: Monograph (Working Paper)
Official URL: http://www.ssrn.com/en/
Additional Information: © 2015 The Author
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 14 Jan 2015 14:19
Last Modified: 14 Mar 2019 00:04
Funders: Paul Woolley Center, LSE
URI: http://eprints.lse.ac.uk/id/eprint/60737

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