Computational methods for production-based asset pricing models with recursive utility

Subject

Finance

Publishing details

Economic Research Initiatives at Duke (ERID)

Authors / Editors

Aldrich E M; Kung H

Biographies

Publication Year

2017

Abstract

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 effect 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

DSGE Models; Nonlinear Solution Methods; Numerical Dynamic Programming; Recursive Utility; Asset Pricing

Series Number

87

Series

Economic Research Initiatives at Duke (ERID)