Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/195528 
Authors: 
Year of Publication: 
2016
Citation: 
[Journal:] Quantitative Economics [ISSN:] 1759-7331 [Volume:] 7 [Issue:] 3 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2016 [Pages:] 859-887
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
Motivated by the problems of the conventional model in rationalizing market data, we derive the equilibrium interest rate and risk premiums using recursive utility in a continuous-time model. We use the stochastic maximum principle to analyze the model. This method uses forward/backward stochastic differential equations, and works when the economy is not Markovian, which can be the case with recursive utility. With existence granted, the wealth portfolio is characterized in equilibrium in terms of utility and aggregate consumption. The equilibrium real interest rate is derived, and the resulting model is shown to be consistent with rea- sonable values of the parameters of the utility function when calibrated to market data, under various assumptions.
Subjects: 
The equity premium puzzle
recursive utility
the stochastic maximum principle
JEL: 
D9
D51
D53
D90
E21
G10
G12
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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