Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2005/16: Dynamic General Equilibrium and T-Period Fund Separation

Anke Gerber (), Thorsten Hens () and Peter Woehrmann ()
Additional contact information
Anke Gerber: Institute for Empirical Research in Economics, University of Zurich, Postal: Institute for Empirical Research in Economics, University of Zurich, Plattenstr. 32 , CH-8032 Zurich, Switzerland
Thorsten Hens: Institute for Empirical Research in Economics, University of Zurich, Postal: Institute for Empirical Research in Economics, University of Zurich, Blümlisalpstrasse 10, CH-8006 Zürich, Switzerland
Peter Woehrmann: Institute for Empirical Research in Economics, University of Zurich, Postal: Institute for Empirical Research in Economics, University of Zurich, Plattenstr. 32 , CH-8032 Zurich, Switzerland

Abstract: We consider a dynamic general equilibrium model with incomplete markets in which we derive conditions for separating the savings decision from the asset allocation decision. It is shown that with logarithmic utility functions this separation holds for any heterogeneity of discount factors while the generalization to constant relative risk aversion only holds for homogeneous discount factors. Our results have simple asset pricing implications for the time series and also the cross section of asset prices. It is found that on data from the DJIA a risk aversion weaker than in the logarithmic case fits best.

Keywords: Dynamic general equilibrium model; asset pricing

JEL-codes: D50

36 pages, December 22, 2005

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