Abstract
In this chapter we study a time-consistent equilibrium model, namely a discrete-time simplified version of the Cox–Ingersoll–Ross continuous-time model. We start by analyzing a consumption–investment problem in which the agent considers all prices as exogenously given. We then move to the equilibrium framework, in which the short rate, the stochastic discount factor, and the martingale measure are determined endogenously in equilibrium. In Chap. 10 we will study a time-inconsistent version of this standard problem, and it will be instructive to compare the results.
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References
Back, K. (2010). Asset pricing and portfolio choice theory. Oxford University Press.
Cox, J., Ingersoll, J., & Ross, S. (1985). An intertemporal general equilibrium model of asset prices. Econometrica, 53, 363–384.
Duffie, D. (2001). Dynamic asset pricing theory (3rd ed.). Princeton University Press.
Pennacchi, G. (2008). Theory of asset pricing. Pearson.
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Björk, T., Khapko, M., Murgoci, A. (2021). A Simple Equilibrium Model. In: Time-Inconsistent Control Theory with Finance Applications. Springer Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-81843-2_4
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DOI: https://doi.org/10.1007/978-3-030-81843-2_4
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