Luciano de Castro (University of Iowa)

Luciano de Castro (University of Iowa)

Oct 27, 2023 - 12:00 PM
to Oct 27, 2023 - 1:00 PM

Description: Department Seminar Luciano de Castro (University of Iowa) 

Location: 368A Heady 

Contact Person: Jian Li

Title: Asset Pricing with Quantile Preferences and the Equity Premium Puzzle.

Abstract: This paper studies the determination of equilibrium asset prices in a pure exchange economy populated by infinitely many identical individual consumers with dynamic quantile preferences, in which assets are infinitely-lived trees.  In this recursive model under uncertainty,  economic agents maximize preferences of intertemporal consumption, that is, the discounted value of stream of future $\tau$-quantile utilities, for $\tau \in (0,1)$. The quantile model allows for separation of the risk attitude, which is captured by the quantile $\tau$, from the elasticity of intertemporal substitution. We derive the price function and show that it is the present discounted value of the stream of future composition of quantiles of dividends multiplied by the standard stochastic discount factor. Hence, the price is an explicit function of the risk attitude. We take this model to the data and show that it is able to fit the average equity return and risk free rate at reasonable levels of risk aversion and elasticity of intertemporal substitution.