Abstract
We propose an equilibrium model of the term structures of bonds and equities, which has a similar descriptive ability to the reduced form model proposed by Lettau and Wachter (2011) (LW), and yet offers economic implications about preferences and consumption dynamics. The key is to let the parameters of recursive utility depend on state variables of the economy and replicate the stochastic discount factor specified by LW. We show that the model can explain the stylized facts about the various term structures, which, however, requires a high risk aversion, a high consumption volatility, or both. This tension can be alleviated by changing the parameters of the state-dependent preferences in our model.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
