Study of asset returns in SGM

Naik, V. 1994. "Asset Prices in Dynamic Production Economies with Time-Varying Risk." Review of financial studies, 7(4), 781-801.

Model
(i)   time-varying uncertainty of the marginal product of capital (productivity shocks),
(ii)  the presence of capital adjustment costs,
(iii) the separation of intertemporal substitution and risk aversion (EZ preferences), and
(iv) the allowance for first-order risk aversion in investors' preferences.

Results
(i)   the sensitivity of the price of the aggregate capital stock to shifts in risk is crucially dependent on the level of capital adjustment costs.  The effect of shifts in uncertainty is significant only when capital adjustment costs are substantial.
(ii)  Intertemporal substitution governs the direction of the effect of changes in risk on the value ofcapital stock.  Risk aversion is important in the determination of the magnitude of this effect.


Campanale, C.; R. Castro and G. L. Clementi. 2010. "Asset Pricing in a Production Economy with Chew-Dekel Preferences." Review of Economic Dynamics, 13(2), 379-402.

<quote>
Tallarini (2000) showed that the first of the two issues just outlined can be addressed by disentangling risk aversionfrom the elasticity of intertemporal substitution. By assuming Epstein–Zin preferences, he was able to raise risk aversion at arbitrarily high levels, while keeping the elasticity of substitution anchored at 1. Tallarini went on to show the existence of RRA coefficients such that the market price of risk is consistent with the empirical evidence. However, the price of capital being constant at 1, his model essentially generates no equity premium. This issue was dealt with successfully by Jermann (1998) and Boldrin et al. (2001), who assumed that the allocation of capital cannot adjust immediately or costlessly to productivity shocks. Impediments to the smooth adjustment of capital imply that its price may vary away from 1. However, without limiting households’ willingness to substitute consumption intertemporally, this innovation results mainly in a higher volatility of consumption growth. Both Jermann (1998) and Boldrin et al. (2001) lower the IES by introducing habit formation. The resulting increase in the curvature of the Bernoulli utility function, by increasing risk aversion, also takes care of increasing the volatility of the stochastic discount factor.
<unquote>

SGM; Stochastic Growth Model