Peso problems in the estimation of the C‐CAPM

Juan Carlos Parra‐Alvarez, Olaf Posch and Andreas Schrimpf
Authors registered in the RePEc Author Service: Juan Carlos Parra-Alvarez

Quantitative Economics, 2022, vol. 13, issue 1, 259-313

Abstract: This paper shows that the consumption‐based capital asset pricing model (C‐CAPM) with low‐probability disaster risk rationalizes pricing errors. We find that implausible estimates of risk aversion and time preference are not puzzling if market participants expect a future catastrophic change in fundamentals, which just happens not to occur in the sample (a “peso problem”). A bias in structural parameter estimates emerges as a result of pricing errors in quiet times. While the bias essentially removes the pricing error in the simple models when risk‐free rates are constant, time‐variation may also generate large and persistent estimated pricing errors in simulated data. We also show analytically how the problem of biased estimates can be avoided in empirical research by resolving the misspecification in moment conditions.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.3982/QE1478

Related works:
Working Paper: Peso Problems in the Estimation of the C-CAPM (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:quante:v:13:y:2022:i:1:p:259-313

Ordering information: This journal article can be ordered from
https://www.econometricsociety.org/membership

Access Statistics for this article

More articles in Quantitative Economics from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().