Asset pricing and the role of macroeconomic volatility |
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Authors: | Stefano d’Addona Christos Giannikos |
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Institution: | 1. Department of Political Science, University of Rome 3, Via G. Chiabrera, 199, 00145, Rome, Italy 2. Zicklin School of Business, Baruch College CUNY, Box B10-225, One Bernard Baruch Way, New York, NY, 10010, USA
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Abstract: | Standard Real Business Cycle (RBC) models are well known to generate counter-factual asset pricing implications. This study provides a simple extension to the prior literature by studying an economy that follows a regime-switching process in conjunction with Epstein–Zin preferences for consumers. We provide a detailed theoretical and numerical analysis of the model’s predictions. We also show that a reasonable parameterization of our model conveys financial figures in line with US postwar data. Furthermore, we provide evidence in support of modeling a regime-dependent macroeconomic risk. |
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