Hello What is the Euler equation used for in this model in equation 7. This is a model from asset pricing. c_t = ConsumptionU = Utility Equation 5:U' (+1) (Bt+1 +Y;t+1U' (c)1 = E, 8-R,where we define M, = 8 as the stochastic discount factor (equivalently, the intertemporalmarginal rate of substitution here) and Rj4+1 = t1) as the gross return to asset j. NoteU(c)Equation 61-y- 1U (c.) =1-7Equation 71 = E,t+1Delta =Subjective Discount factor9i: = Price of stockY = DividendG:+1 = Growht rate of consumption

The asset pricing model describes the expected rate of return and the risk involved in investing in…

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What is the Euler equation used for in this model in equation 7. This is a model from asset pricing. c_t = Consumption U = Utility

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

Hello

What is the Euler equation used for in this model in equation 7. This is a model from asset pricing.

c_t = Consumption

U = Utility

Equation 5:
U' (+1) (Bt+1 +Y;t+1
U' (c)
1 = E, 8-
R,
where we define M, = 8 as the stochastic discount factor (equivalently, the intertemporal
marginal rate of substitution here) and Rj4+1 = t1) as the gross return to asset j. Note
U(c)
Equation 6
1-y
- 1
U (c.) =
1-7
Equation 7
1 = E,
t+1
Delta =
Subjective Discount factor
9i: = Price of stock
Y = Dividend
G:+1 = Growht rate of consumption

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