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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29940
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| Title: | Sources of Entropy in Representative Agent Models |
| Authors: | Backus, David
Chernov, Mikhail
Zin, Stanley |
| Keywords: | pricing kernel
asset returns
bond yields
recursive preferences
habits
jumps
disasters |
| Issue Date: | 11-Jul-2011 |
| Abstract: | We propose two metrics for asset pricing models and apply them to
representative agent models with recursive preferences, habits, and
jumps. The metrics describe the pricing kernel’s dispersion (the
entropy of the title) and dynamics (time dependence, a measure of how
entropy varies over different time horizons). We show how each model
generates entropy and time dependence and compare their magnitudes to
estimates derived from asset returns. This exercise — and
transparent loglinear approximations — clarifies the mechanisms
underlying these models. It also reveals, in some cases, tension between
entropy, which should be large enough to account for observed excess
returns, and time dependence, which should be small enough to account
for mean yield spreads. |
| URI: | http://hdl.handle.net/2451/29940 |
| Appears in Collections: | Economics Working Papers
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