NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Pricing Long-Lived Securities in Dynamic Endowment Economies

Jerry Tsai, Jessica A. Wachter

NBER Working Paper No. 24641
Issued in May 2018
NBER Program(s):Technical Working Papers

We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our results clarify model properties governed by the elasticity of intertemporal substitution, by risk aversion, and by the preference for early resolution of uncertainty. Finally, we show in a general setting that the linear relation between normal-times covariances and expected returns need not hold in a model with rare events.

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Document Object Identifier (DOI): 10.3386/w24641

Published: Jerry Tsai & Jessica A. Wachter, 2018. "Pricing long-lived securities in dynamic endowment economies," Journal of Economic Theory, vol 177, pages 848-878.

 
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