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Readings for next time

posted Feb 4, 2012, 12:28 PM by Jim Dolmas
After we finish up the Mehra-Prescott section of Lecture 3, we'll look at some of the responses to the equity premium puzzles. I think we'll start on the preference side, and save the technology side (disasters, long-run risk) for the subsequent class.

On preferences, we need to talk about Epstein-Zin preferences, habits, and possibly state dependent preferences or disappointment aversion.

I'm attaching a few papers...

Campbell & Cochrane, JPE 1999. An important paper in the literature on habits. We'll probably work with a much simpler computational model though.

Melino & Yang, RED 2003. This is mostly about state-dependent preferences, but I really like one of the tricks they use, which involves deriving the return process consistent with the unconditional first and second moments of returns and measurable with respect to the Mehra-Prescott endowment process. To see what you can do with that, read the beginning of...

Routledge & Zin, JF 2010, "Generalized Disappointment Aversion and Asset Prices". Parts of this are quite technical. Just try to get the big picture for now.

Epstein & Zin, JME 1990. We may only touch on 'first order risk aversion', but this paper is still a good introduction to applying EZ preferences to the Mehra-Prescott framework.

Also, here's a link to a paper of mine that's off-topic (it's about the cost of business cycles), but may be useful for it's discussion of EZ preferences and for the computational approach to finding the value function (described in the paper's appendix), which we'll need to use when we put EZ preferences into the Mehra-Prescott model.
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Jim Dolmas,
Feb 4, 2012, 12:28 PM
Ċ
Jim Dolmas,
Feb 4, 2012, 12:28 PM
Ċ
Jim Dolmas,
Feb 4, 2012, 12:28 PM
Ċ
Jim Dolmas,
Feb 4, 2012, 12:28 PM
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