The performance of a given portfolio policy can in principle be evaluated by comparing its expected utility with that of the optimal policy. Unfortunately, the optimal policy is usually not computable in which case a direct comparison is impossible. In this paper we solve this problem by using...

In a standard incomplete markets model with a continuum of households that have constant relative risk aversion (CRRA) preferences, the absence of insurance markets for idiosyncratic labor income risk has no effect on the premium for aggregate risk if the distribution of idiosyncratic risk is...

This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the Duffie-Epstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly...

Why did the real interest rate decline and the equity premium increase over the last 30 years? This paper assesses the role of uncertainty and credit market frictions. We quantify a model with heterogeneous households using data on asset prices and macro aggregates, as well as on households'...

We introduce and analyze a new market design for trading financial assets. The design allows traders to directly trade any user-defined linear combination of assets. Orders for such portfolios are expressed as downward-sloping piecewise-linear demand curves with quantities as flows...

This paper considers VAR models incorporating many time series that interact through a few dynamic factors. Several econometric issues are addressed including estimation of the number of dynamic factors and tests for the factor restrictions imposed on the VAR. Structural VAR identification based...

Recent research documents that aggregate stock prices are driven by shocks with persistence levels ranging from daily intervals to several decades. Building on these insights, we introduce a parsimonious equilibrium model in which regime-shifts of heterogeneous durations affect the volatility of...

We analyze the impact of time series dependence in market microstructure noise on the properties of estimators of the integrated volatility of an asset price based on data sampled at frequencies high enough for that noise to be a dominant consideration. We show that combining two time scales for...

The life-cycle accounts proposal for Social Security reform has been justified by its proponents using a number of different arguments, but these arguments generally involve the assumption of a high likelihood of good returns on the accounts. A simulation is undertaken to estimate the...