Job market paper

• Survival and long-run dynamics with heterogeneous beliefs under recursive preferences
  [PDF, 2 January 2012] Circulated under the title Heterogeneous beliefs under recursive preferences.
  Online appendix with additional discussion and results
  I study the long-run behavior of a two-agent economy where agents differ in their beliefs and are endowed with homothetic recursive preferences of the Duffie-Epstein-Zin type. When preferences are separable, the economy is dominated in the long run by the agent whose beliefs are relatively more accurate, a result consistent with the market selection hypothesis. However, recursive preference specifications lead to equilibria in which both agents survive, or to ones where either agent can dominate the economy with a strictly positive probability. In this respect, the market selection hypothesis is not robust to deviations from separability. I derive analytical conditions for the existence of nondegenerate long-run equilibria, and show that these equilibria exist for plausible parameterizations when risk aversion is larger than the inverst of the intertemporal elasticity of substitution, providing a justification for models that combine belief heterogeneity and recursive preferences.

Publications

• Risk-price dynamics (with Lars Peter Hansen, Mark Hendricks, and José Scheinkman) Journal of Financial Econometrics (2011) 9 (1): 3-65.
  [PDF, 13 July 2010], link to journal webpage: doi: 10.1093/jjfinec/nbq030
  We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.

Working papers

• Examining Macroeconomic Models through the Lens of Asset Pricing (with Lars Peter Hansen)
  [PDF, 8 December 2011]
  Shock elasticity toolbox for the computation of shock elasticities in models solved by Dynare/Dynare++ can be downloaded from the software page.
  Dynamic stochastic equilibrium models of the macro economy are designed to match the macro time series including impulse response functions. Since these models aim to be structural, they also have implications for asset pricing. To assess these implications, we explore asset pricing counterparts to impulse response functions. We use the resulting dynamic value decomposition (DVD) methods to quantify the exposures of macroeconomic cash flows to shocks over alternative investment horizons and the corresponding prices or compensations that investors must receive because of the exposure to such shocks. We build on the continuous-time methods developed in Hansen and Scheinkman (2009), Borovička, Hansen, Hendricks, and Scheinkman (2011) and Hansen (2011) by constructing discrete-time shock elasticities that measure the sensitivity of cash flows and their prices to economic shocks including economic shocks featured in the empirical macroeconomics literature. By design, our methods are applicable to economic models that are nonlinear, including models with stochastic volatility. We illustrate our methods by analyzing the asset pricing model of Ai, Croce, and Li (2011) with tangible and intangible capital.
  Dynare model code [ZIP file] for the example in Section 7, based on the paper by Ai, Croce and Li (2010). Use in conjunction with the shock elasticity toolbox to produce the shock elasticities.