DSGE Asset Pricing
Posted: Tue Jul 08, 2014 7:51 amDear all,
I did replicate Jermann's 1998 JME paper Asset Pricing in Production Economies in order to get some practice in analyzing asset pricing issues within a DSGE framework. The results seem to be reasonable. However, the following points raise some doubts about the correctness of the results:
1.) In a model specification without leverage, the return on capital (R) is supposed to be equivalent to the gross stock return (req). My results indicate that R>req.
2.) The standard deviation of req is the same as the standard deviation of the risk free rate (rf), while correctly the standard deviation of R is larger than the one of rf. Since R and req are supposed to be the same, the standard deviation should be equivalent as well.
3.) The equity premium of 12.8 % seems to be rather high.
I would be very glad if someone could look into these issues and provide some clarification.
Best, Jürg
I did replicate Jermann's 1998 JME paper Asset Pricing in Production Economies in order to get some practice in analyzing asset pricing issues within a DSGE framework. The results seem to be reasonable. However, the following points raise some doubts about the correctness of the results:
1.) In a model specification without leverage, the return on capital (R) is supposed to be equivalent to the gross stock return (req). My results indicate that R>req.
2.) The standard deviation of req is the same as the standard deviation of the risk free rate (rf), while correctly the standard deviation of R is larger than the one of rf. Since R and req are supposed to be the same, the standard deviation should be equivalent as well.
3.) The equity premium of 12.8 % seems to be rather high.
I would be very glad if someone could look into these issues and provide some clarification.
Best, Jürg