Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2005/16:
Dynamic General Equilibrium and T-Period Fund Separation
Anke Gerber ()
, Thorsten Hens ()
and Peter Woehrmann ()
Abstract: We consider a dynamic general equilibrium model with
incomplete markets in which we derive conditions for separating the savings
decision from the asset allocation decision. It is shown that with
logarithmic utility functions this separation holds for any heterogeneity
of discount factors while the generalization to constant relative risk
aversion only holds for homogeneous discount factors. Our results have
simple asset pricing implications for the time series and also the cross
section of asset prices. It is found that on data from the DJIA a risk
aversion weaker than in the logarithmic case fits best.
Keywords: Dynamic general equilibrium model; asset pricing; (follow links to similar papers)
JEL-Codes: D50; (follow links to similar papers)
36 pages, December 22, 2005
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