Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-26T15:22:43.809Z Has data issue: false hasContentIssue false
  • English
  • Français

SPECTRAL PROPERTIES OF ASSET PRICING MODELS: A GENERAL EQUILIBRIUM PERSPECTIVE

Published online by Cambridge University Press:  24 March 2006

KEVIN E. BEAUBRUN-DIANT
KEVIN E. BEAUBRUN-DIANT
Affiliation:
EconomiX, University of Paris X
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper studies asset returns adopting an alternative strategy to assess a model's goodness of fit. Based on spectral analysis, this approach considers a model as an approximation to the process generating the observed data, and characterizes the dimensions for which the model provides a good approximation and those for which it does not. Our aim is to offer new evidence regarding the size and the location of approximation errors of a set of stochastic growth models considered to be decisive steps in the progress of the asset pricing research program. Our specific objective is to reevaluate the results of Jermann's (1998) model extending the calculations to the spectral domain. Spectral results are relatively satisfactory: the benchmark model needs very few contributions of approximation errors to account for the empirical equity premium. Second, the location of the approximation errors, when they are substantial, seems to be essentially concentrated at high frequencies.

Keywords

Equity Premium PuzzleHabit FormationCapital Adjustment CostSpectral Analysis
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 10 , Issue 2 , April 2006 , pp. 183 - 205
Copyright
© 2006 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Berkowitz J. 2001 Generalized spectral estimation of the consumption-based asset pricing model. Journal of Econometrics 104, 269– 288.Google Scholar
Boldrin M., L.J. Christiano, and J.D.M. Fisher 1995 Asset Pricing Lessons for Modeling Business Cycles. NBER Working Paper 5262.Google Scholar
Boldrin M., L.J. Christiano, and J.D.M. Fisher 2001 Habit persistence, asset returns and the business cycle. American Economic Review 91, 149– 166.Google Scholar
Campbell J.Y. and J. Ammer 1993 What moves the stock and bond markets? a variance decomposition for long-term asset returns. Journal of Finance 48, 3– 37.Google Scholar
Campbell J.Y., A.W. Lo, and A.C. MacKinlay 1997 The Econometrics of Financial Markets. Princeton, NJ: Princeton University Press.
Christiano L.J. and J.D.M. Fisher 1995 Tobin's Q and Asset Returns: implications for Business Cycle Analysis. NBER Working Paper 5292.Google Scholar
Christiano L.J. and J.D.M. Fisher 1998 Stock Market and Investment Good Prices: implications for Macroeconomics. Federal Reserve Bank of Chicago Working Paper 98-6.Google Scholar
Cogley T. 2001 A frequency decomposition of approximation errors in stochastic discount factor models. International Economic Review 42, 473– 503.Google Scholar
Constantinides G.M. 1990 Habit formation: a resolution of the equity premium puzzle. Journal of Political Economy 98, 519– 543.Google Scholar
Daniel K.D. and D.A. Marshall 1997 Equity premium and risk-free rate puzzles at long horizons. Macroeconomic Dynamics 1, 452– 484.Google Scholar
Daniel K.D. and D.A. Marshall 1998 Consumption-Based Modeling of Long-Horizon Returns. Federal Reserve of Chicago Working Papers Series 98-18.Google Scholar
Ellison M. and A. Scott 2001 Sticky prices and volatile output. Journal of Monetary Economics 46, 621– 632.Google Scholar
Gouriéroux C., A. Monfort, and E. Renault 1993 Indirect inference. Journal of Applied Econometrics 8, 85– 118.Google Scholar
Hansen L.P. and R. Jagannathan 1997 Assessing specification errors in stochastic discount factor models. Journal of Finance 52, 557– 590.Google Scholar
Heaton J. 1995 An empirical investigation of asset pricing with temporally dependent preference specifications. Econometrica 63, 681– 717.Google Scholar
Jermann U.J. 1998 Asset pricing in production economy. Journal of Monetary Economics 41, 257– 275.Google Scholar
Judd K.L. 1998 Numerical Methods in Economics. Cambridge, MA: MIT Press.
King R.G. and S.T. Rebelo 1999 Resuscitating real business cycles. In J.B. Taylor and M. Woodford (eds.), Handbook of Macroeconomics, Vol. 1B, pp. 927– 1007. North Holland: Elsevier Science.
Kocherlakota N.R. 1996 The equity premium: It's still a puzzle. Journal of Economic Literature 34, 42– 71.Google Scholar
Kydland F.E. and E.C. Prescott 1982 Time to build and agregate fluctuations. Econometrica 50, 1345– 1370.Google Scholar
Mehra R. and E.C. Prescott 1985 The equity premium: a puzzle. Journal of Monetary Economics 15, 145– 161.Google Scholar
Prescott E.C. 1986 Theory ahead of business cycle measurement. Carnegie-Rochester Conference Series on Public Policy, 11– 66.Google Scholar
Rouwenhorst G.K. 1995 Asset pricing implications of equilibrium business cycle models. In T.F. Cooley (ed.), Frontiers of Business Cycle Research, pp. 294– 330. Princeton, NJ: Princeton University Press.
Smith A. 1993 Estimating non linear time series models using simulated vector autoregressions. Journal of Applied Econometrics 8, 63– 84.Google Scholar
Watson M.W. 1993 Measures of fit for calibrated models. Journal of Political Economy 101, 1011– 1141.Google Scholar
Weil P. 1989 The equity premium puzzle and the risk-free rate puzzle. Journal of Monetary Economics 24, 401– 421.Google Scholar