Pricing of the time-change risks

Published

Journal Article

We develop an equilibrium endowment economy with Epstein-Zin recursive utility and a Lévy time-change subordinator, which represents a clock that connects business and calendar time. Our setup provides a tractable equilibrium framework for pricing non-Gaussian jump-like risks induced by the time-change, with closed-form solutions for asset prices. Persistence of the time-change shocks leads to predictability of consumption and dividends and time-variation in asset prices and risk premia in calendar time. In numerical calibrations, we show that the risk compensation for Lévy risks accounts for about one-third of the overall equity premium. © 2011 Elsevier B.V.

Full Text

Duke Authors

Cited Authors

  • Shaliastovich, I; Tauchen, G

Published Date

  • June 1, 2011

Published In

Volume / Issue

  • 35 / 6

Start / End Page

  • 843 - 858

International Standard Serial Number (ISSN)

  • 0165-1889

Digital Object Identifier (DOI)

  • 10.1016/j.jedc.2011.01.003

Citation Source

  • Scopus