World Conference Econometric Society, 2000, Seattle

Olivier Allais, EUREQua |

Local Durability and Long-Run Persistence: An Evaluation of the U.S. Risk Premia |

Session: C-10-24 Tuesday 15 August 2000 by Allais, Olivier |

I study the empirical properties of a non-linear stochastic dynamic representative-agent model with rational expectations. The representative agent is assumed to have time non separable preferences. The time nonseparability in preferences is due to local substitution of consumption over time as well as to long-run habit persistence. Specifically, I investigate whether the dynamic model replicates the observed mean and the standard deviation of the U.S real returns in the 1965-1987 period. I use a projection method to solve the model and then I evaluate the intertemporal marginal rate of substitution (IMRS) as well as the asset returns implied by the dynamic model. First, I find that the IMRS implied by the model statistically fits the Hansen and Jagannathan bound. Secondly, I find that combined effects of substituion and complementarity over consumption nearly solve the equity premium and the risk-free rate puzzles. |

Submitted paper full-text in .pdf |

File created by Jurgen Doornik with eswc2000.ox on 2-01-2001