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Asset pricing with dynamic programming

Title data

Grüne, Lars ; Semmler, Willi:
Asset pricing with dynamic programming.
In: Computational Economics. Vol. 29 (January 2007) Issue 3/4 . - pp. 233-265.
ISSN 1572-9974
DOI: https://doi.org/10.1007/s10614-006-9063-1

Abstract in another language

The study of asset price characteristics of stochastic growth models such as the risk-free interest rate, equity premium and the Sharpe-ratio has been limited by the lack of global and accurate methods to solve dynamic optimization models. In this paper a stochastic version of a dynamic programming method with adaptive grid scheme is applied to compute the asset price characteristics of a stochastic growth model. The stochastic growth model is of the type as developed by Brock and Mirman (1972) and Brock (1979, 1982). It has become the baseline model in the stochastic dynamic general equilibrium literature. In a first step, in order to test our procedure, it is applied to this basic stochastic growth model for which the optimal consumption and asset prices can analytically be computed. Since, as shown, our method produces only negligible errors, as compared to the analytical solution, in a second step, we apply it to more elaborate stochastic growth models with adjustment costs and habit formation. In the latter model preferences are not time separable and past consumption acts as a constraint on current consumption. This model gives rise to an additional state variable. We here too apply our stochastic version of a dynamic programming method with adaptive grid scheme to compute the above mentioned asset price characteristics. We show that our method is very suitable to be used as solution technique for such models with more complicated decision structure.

Further data

Item Type: Article in a journal
Refereed: Yes
Keywords: Stochastic growth models; Asset pricing; Stochastic dynamic programming; Adaptive grid
Institutions of the University: Faculties
Faculties > Faculty of Mathematics, Physics und Computer Science
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics)
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics) > Chair Mathematics V (Applied Mathematics) - Univ.-Prof. Dr. Lars Grüne
Result of work at the UBT: Yes
DDC Subjects: 500 Science
500 Science > 510 Mathematics
Date Deposited: 04 Mar 2021 07:11
Last Modified: 23 Mar 2021 09:12
URI: https://eref.uni-bayreuth.de/id/eprint/63641