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General Equilibrium With Constant Relative Risk Aversion And Vasicek Interest Rates

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  • Robert Goldstein
  • Fernando Zapatero
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    Abstract

    We consider a pure exchange economy consisting of a single risky asset whose dividend drift rate is modeled as an Omstein-Uhlenbeck process, and a representative agent with power-utility who, in equilibrium, consumes the dividend paid by the risky asset. Endogenously determined interest rates are found to be of the Vasicek (1977) type the mean and variance of the equilibrium stock price are stochastic and have mean-reverting components A closed-form solution for a standard call option is determined for the case of log-utility. Equilibrium values have interesting implications for the equity premium puzzle observed by Mehra and Prescott (1985) Copyright 1996 Blackwell Publishers.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Mathematical Finance.

    Volume (Year): 6 (1996)
    Issue (Month): 3 ()
    Pages: 331-340

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    Handle: RePEc:bla:mathfi:v:6:y:1996:i:3:p:331-340

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    Cited by:
    1. George W. Blazenko & Andrey D. Pavlov, 2010. "Investment Timing for New Business Ventures," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 37-68, Fall.
    2. Bakshi, Gurdip S. & Zhiwu, Chen, 1997. "An alternative valuation model for contingent claims," Journal of Financial Economics, Elsevier, vol. 44(1), pages 123-165, April.
    3. Lundtofte, Frederik, 2008. "Expected life-time utility and hedging demands in a partially observable economy," European Economic Review, Elsevier, vol. 52(6), pages 1072-1096, August.
    4. Antonio Mele, 2004. "General properties of rational stock-market fluctuations," LSE Research Online Documents on Economics 24701, London School of Economics and Political Science, LSE Library.
    5. Dragon Tang & Hong Yan, 2006. "Macroeconomic Conditions, Firm Characteristics, and Credit Spreads," Journal of Financial Services Research, Springer, vol. 29(3), pages 177-210, June.

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