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SPECTRAL PROPERTIES OF ASSET PRICING MODELS: A GENERAL EQUILIBRIUM PERSPECTIVE

Published online by Cambridge University Press:  24 March 2006

KEVIN E. BEAUBRUN-DIANT
KEVIN E. BEAUBRUN-DIANT
Affiliation:
EconomiX, University of Paris X
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Abstract

This paper studies asset returns adopting an alternative strategy to assess a model's goodness of fit. Based on spectral analysis, this approach considers a model as an approximation to the process generating the observed data, and characterizes the dimensions for which the model provides a good approximation and those for which it does not. Our aim is to offer new evidence regarding the size and the location of approximation errors of a set of stochastic growth models considered to be decisive steps in the progress of the asset pricing research program. Our specific objective is to reevaluate the results of Jermann's (1998) model extending the calculations to the spectral domain. Spectral results are relatively satisfactory: the benchmark model needs very few contributions of approximation errors to account for the empirical equity premium. Second, the location of the approximation errors, when they are substantial, seems to be essentially concentrated at high frequencies.

Keywords

Equity Premium PuzzleHabit FormationCapital Adjustment CostSpectral Analysis
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 10 , Issue 2 , April 2006 , pp. 183 - 205
Copyright
© 2006 Cambridge University Press

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