Equilibrium Asset Pricing with Price War Risks

Dou, Winston Wei; Ji, Yan; Wu, Wei

doi:10.2139/ssrn.3309554

Cited by 2 publications

(1 citation statement)

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“…For example, Gârleanu, Panageas, and Yu (2012) and Kung and Schmid (2015) explicitly model production and innovation to endogenize the consumption dynamics, with a particular focus on low-frequency fluctuations, helping bring in data on the dynamics of research and development (R&D) investment to strengthen statistical identification of the persistence parameter of the aggregate consumption process. Dou, Ji, Tian, and Wang (2021) further connect the endogenous persistent consumption growth with the dynamics of capital misallocation. Another approach is to modify the belief formation mechanism so that the baseline model parameters including those which govern the evolution of agents' (potentially heterogeneous) beliefs are better identified by the baseline moment restrictions and do not rely excessively on the restrictions implied by the asset pricing moments (e.g., Barberis, Shleifer, and Vishny, 1998;Hansen and Sargent, 2010;Chen, Joslin, and Tran, 2012;Greenwood and Shleifer, 2014;Nagel and Xu, 2019).…”

Section: Discussion: How To Deal With Dark Mattermentioning

confidence: 97%

Measuring “Dark Matter” in Asset Pricing Models

CHEN,

DOU,

KOGAN

2024

The Journal of Finance

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We formalize the concept of “dark matter” in asset pricing models by quantifying the additional informativeness of cross‐equation restrictions about fundamental dynamics. The dark‐matter measure captures the degree of fragility for models that are potentially misspecified and unstable: a large dark‐matter measure indicates that the model lacks internal refutability (weak power of optimal specification tests) and external validity (high overfitting tendency and poor out‐of‐sample fit). The measure can be computed at low cost even for complex dynamic structural models. To illustrate its applications, we provide quantitative examples applying the measure to (time‐varying) rare‐disaster risk and long‐run risk models.

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