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Asset Pricing with Delayed Consumption Decisions

Author

Listed:
  • Willi Semmler
  • Lars Grüne

Abstract

The attempt to match characteristics of asset pricing models such as the risk-free interest rate, equity premium and the Sharpe ratio for models with instantaneous consumption decisions in the context of stochastic growth models has not been very successful. Many recent versions of asset pricing models have, in order to match those financial characteristics better with the data, employed habit formation models where there is a delay in consumption decisions. Yet the results of those studies may depend on the solution techniques employed to solve the stochastic dynamic optimization model. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the above mentioned asset price characteristics with delayed consumption decisions, where the delayed consumption decision is treated as an additional state variable of the model. Since our method produces only negligible errors it is suitable to be used as solution technique for elaborate stochastic growth models with a delayed decision structure.

Suggested Citation

  • Willi Semmler & Lars Grüne, 2004. "Asset Pricing with Delayed Consumption Decisions," Computing in Economics and Finance 2004 59, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:59
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    File URL: http://repec.org/sce2004/up.23407.1076778817.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    stochastic growth; habit formation; stochastic DP; adaptive grid; asset pricing;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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