The Fragile Benefits of Endowment Destruction

The benefits of endowment destruction documented by Ljungqvist and Uhlig (2014), and the related possibility that consumption can lower habits, are fragile. Both issues result from a particular way of discretely approximating the underlying continuous-time model, or of adapting it to jumps. Other ways of calculating the discrete-time approximation or extending the model to jumps easily overturn the results, while making no difference to the model’s description of asset prices and quantities. This analysis shows how to extend models so that jumps give the same result as a jump limit of continuous movements. ∗Harvard University and NBER. †University of Chicago Booth School of Business, Hoover Institution, and NBER. ‡We thank Darrell Duffie, Lars Ljungqvist, Stavros Panageas, Monika Piazzesi, and Philip Protter for helpful comments and discussion.