We propose two metrics for asset pricing models and apply them to representative agent models with recursive preferences, habits, and jumps. The metrics describe the pricing kernel’s dispersion (the entropy of the title) and dynamics (time dependence, a measure of how entropy varies over...

We summarize the class of recursive preferences. These preferences fit naturally with recursive solution methods and hold the promise of generating new insights into familiar problems. Portfolio choice is used as an example

We explore the practitioners methodology of choosing time-dependent parameters to fit a bond model to selected asset prices, and show that it can lead to systematic mispricing of some assets. The Black-Derman-Toy model, for example, is likely to overprice call options on long bonds when interest...

Mathematical models of bond pricing are used by both academics and Wall Street practitioners, with practitioners introducing time-dependent parameters to fit acirc;not;Sarbitrage-freeacirc;not;? models to select asset prices. We show, in a simple one-factor setting, that the ability of such models...

We provide a useracirc;not;quot;s guide to acirc;not;Sexoticacirc;not;? preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risk sensitive and robust control, acirc;not;Shyperbolicacirc;not;? discounting, and...

We provide a useracirc;not;quot;s guide to acirc;not;Sexoticacirc;not;? preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risk sensitive and robust control, acirc;not;Shyperbolicacirc;not;? discounting, and...

Identi fication problems arise naturally in forward-looking models when agents observe more than economists. We illustrate the problem in several macro- finance models with Taylor rules. When the shock to the rule is observed by agents but not economists, identifi cation of the rule's parameters...