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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 24 (2020)

Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

Eric Mark Aldrich / Howard Kung
  • London Business School, Department of Finance, London, United Kingdom of Great Britain and Northern Ireland
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2019-12-14 | DOI: https://doi.org/10.1515/snde-2017-0003


We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improvements for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which affect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Keywords: asset pricing; DSGE models; nonlinear solution methods; numerical dynamic programming; recursive utility


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About the article

Published Online: 2019-12-14

Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20170003, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2017-0003.

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