On the Economic Impact of Modeling Non-Linearities: The Asset Pricing Example

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On the Economic Impact of Modeling Non-Linearities: The Asset Pricing Example

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Prasad Bidarkota () (Department of Economics, Florida International University)

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Prasad V. Bidarkota

Abstract

We investigate the economic importance of modeling non-linearities in the dynamics of exogenous processes on the implied moments of endogenous variables in the context of the consumption-based asset pricing model. For this purpose, we model the endowment process alternatively as a linear autoregression and as a non-linear threshold autoregression. The asset pricing model with non-linear endowment is solved using quadrature techniques. A comparison of the moments of the model-implied rates of return in the two cases suggests that the economic impact of modeling non-linearities is less than 0.01 percent per annum.

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Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0305.

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Length: 28 pages
Date of creation: Nov 2003
Date of revision:
Publication status: Forthcoming in Macroeconomic Dynamics
Handle: RePEc:fiu:wpaper:0305

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-10-15 (All new papers)
NEP-CFN-2005-10-15 (Corporate Finance)
NEP-FIN-2005-10-15 (Finance)
NEP-FMK-2005-10-15 (Financial Markets)

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