Working Paper: NBER ID: w16153
Authors: Ian Martin
Abstract: I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth. Information about the higher moments--equivalently, cumulants--of consumption growth is encoded in the cumulant-generating function. I apply the framework to economies with rare disasters, and argue that the importance of such disasters is a double-edged sword: parameters that govern the frequency and sizes of rare disasters are critically important for asset pricing, but extremely hard to calibrate. I show how to sidestep this issue by using observable asset prices to make inferences that are robust to the details of the underlying consumption process.
Keywords: No keywords provided
JEL Codes: E44; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| frequency and severity of disasters (H84) | riskless rate (E43) |
| frequency and severity of disasters (H84) | equity premium (G12) |
| consumption-wealth ratio (E21) | risk premium (G19) |
| risk premium (G19) | consumption-wealth ratio (E21) |