Recent evidence of substantial differences between exporters and non-exporters has led Melitz (2003) to develop a general equilibrium theory of international trade that emphasizes productive heterogeneity across many monopolistically competitive establishments facing fixed costs of exporting. This theory is consistent with the evidence that the biggest, most productive establishments do the bulk of exporting and evidence of large fixed costs of exporting. In this theory, tariffs and trade barriers reduce the value of exporting and thus discourage some relatively productive establishments from incurring the fixed cost to export. This lowers trade flows and shifts production away from relatively productive establishments toward relatively unproductive non-exporters.
The goal of this paper is to fill a void in the literature. There are, to our knowledge, no head-to-head, statistical (i.e. likelihood based or asymptotically equivalent) comparisons of asset pricing models from macro/finance. This paper fills the void. The asset pricing models considered are the habit persistence model of Campbell and Cochrane (1999), CC hereafter, the long-run risks model of Bansal and Yaron (2004), BY hereafter, and the prospect theory model of Barberis, Huang, and Santos (2001), BHS hereafter. There are two reason for this choice: These three models are arguably the leading contenders and the authors describe their computational methods precisely enough to permit replication of thier results.
The need for a statistical comparison of asset pricing models is underscored by the ongoing debate between advocates of the long-run risks and habit models. Beeler and Campbell (2009) claim that the long-run risks model is rejected by historical data on the basis of the predictability of excess returns, consumption growth, dividend growth, and their respective volatilities by the price to dividend ratio. Bansal, Kiku, and Yaron (2009) argue that the long-run risks model provides adequate predictability results when using a vector auto regression (VAR) based on consumption growth, price to dividend ratio, and the real risk-free rate. Bansal, Kiku and Yaron also argue that the habit model provides counterfactual predictability results for the price to dividend ratio when using lagged consumption growth as a regressor.
Since two decades ago, when the early model of oil futures prices developed by Brennan and Schwartz (1985), there has been a vast change in oil markets arising from both economical and political factors, oil markets are more volatile now compared with twenty or even ten years ago. To understand the behavior of the oil market there is a need to understand the stochastic models of oil prices. Over the last two decades different models have been proposed to justify the stochastic behavior of oil futures contracts. The latest model has been the parsimonious three-factor model by Cortazar and Schwartz (2003). The goal of this article is analysis of the parsimonious three-factor modeling of oil futures prices and the solutions to the futures contracts evaluation formula under the risk neutral measure, as well as the volatility term structure model of futures returns.
