Comparative Evaluation of Asset Pricing Models: The Case of the Equity Premium in Chile
Keywords:
equity premium, asset pricing, relative risk aversion, generalized expected utility, cash-in-advance, ChileAbstract
The purpose of this paper is to evaluate the following asset pricing models: i) time separable constant relative risk aversion (TS-CRRA); ii) generalized expected utility; iii) cash-in advance; and iv) discrete-state economy. The evaluation is made by using the limit of volatility methodology of Hansen and Jagannathan (1991) and the distance test of Cochrane and Hansen (1992). The main results for the Chilean case are: i) the relative risk coefficients required in the TS-CRRA model, generalized preferences and cash in advance are at least 335, 320, and 328, respectively; ii) the use of generalized preferences plays a more important role than cash-in-advance model in explaining the equity premium; and iii) a TS-CRRA model would explain the equity premium if the expected quarterly growth rate of economic activity was -75%.Downloads
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