Abstract:
This study proposes a new way of solving standard dynamic problem based on Simulated
Method of Moments (SMM) approach. It uses a newly introduced model of stock returns
involving latent state variables and the regime-switching fundamentals and estimates three
key preference parameters namely the Coefficient of Relative Risk Aversion, the Elasticity
of Intertemporal Substitution and the subjective discount factor by suitably applying SMM
and without directly using noisy consumption data. The estimates we found here seem to
be relatively better than prevalent studies and very close to the true values of the para meters
