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Pricing of the time-change risks

Publication ,  Journal Article
Shaliastovich, I; Tauchen, G
Published in: Journal of Economic Dynamics and Control
June 1, 2011

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.

Duke Scholars

Published In

Journal of Economic Dynamics and Control

DOI

ISSN

0165-1889

Publication Date

June 1, 2011

Volume

35

Issue

6

Start / End Page

843 / 858

Related Subject Headings

  • Economics
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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Shaliastovich, I., & Tauchen, G. (2011). Pricing of the time-change risks. Journal of Economic Dynamics and Control, 35(6), 843–858. https://doi.org/10.1016/j.jedc.2011.01.003
Shaliastovich, I., and G. Tauchen. “Pricing of the time-change risks.” Journal of Economic Dynamics and Control 35, no. 6 (June 1, 2011): 843–58. https://doi.org/10.1016/j.jedc.2011.01.003.
Shaliastovich I, Tauchen G. Pricing of the time-change risks. Journal of Economic Dynamics and Control. 2011 Jun 1;35(6):843–58.
Shaliastovich, I., and G. Tauchen. “Pricing of the time-change risks.” Journal of Economic Dynamics and Control, vol. 35, no. 6, June 2011, pp. 843–58. Scopus, doi:10.1016/j.jedc.2011.01.003.
Shaliastovich I, Tauchen G. Pricing of the time-change risks. Journal of Economic Dynamics and Control. 2011 Jun 1;35(6):843–858.
Journal cover image

Published In

Journal of Economic Dynamics and Control

DOI

ISSN

0165-1889

Publication Date

June 1, 2011

Volume

35

Issue

6

Start / End Page

843 / 858

Related Subject Headings

  • Economics
  • 1502 Banking, Finance and Investment
  • 1402 Applied Economics
  • 1401 Economic Theory