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Solving Asset Pricing Models when the Price-Dividend Function Is Analytic

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Author Info

  • Ovidiu L. Calin
  • Yu Chen
  • Thomas F. Cosimano
  • Alex A. Himonas

Abstract

We present a new method for solving asset pricing models, which yields an analytic price-dividend function of one state variable. To illustrate our method we give a detailed analysis of Abel's asset pricing model. A function is analytic in an open interval if it can be represented as a convergent power series near every point of that interval. In addition to allowing us to solve for the exact equilibrium price-dividend function, the analyticity property also lets us assess the accuracy of any numerical solution procedure used in the asset pricing literature. Copyright The Econometric Society 2005.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2005.00600.x
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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 73 (2005)
Issue (Month): 3 (05)
Pages: 961-982

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Handle: RePEc:ecm:emetrp:v:73:y:2005:i:3:p:961-982

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Cited by:
  1. Yu Chen & Thomas Cosimano & Alex Himonas, 2008. "Solving an asset pricing model with hybrid internal and external habits, and autocorrelated Gaussian shocks," Annals of Finance, Springer, vol. 4(3), pages 305-344, July.
  2. Kevin J. Lansing, 2007. "Rational and Near-Rational Bubbles Without Drift," 2007 Meeting Papers 970, Society for Economic Dynamics.
  3. Chen, Yu & Cosimano, Thomas F. & Himonas, Alex A., 2008. "Analytic solving of asset pricing models: The by force of habit case," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3631-3660, November.
  4. Eagle, David, 2007. "Revealing the naked truth behind price determinacy, infinite-horizon rational expectations, and inflation targeting," MPRA Paper 1538, University Library of Munich, Germany.
  5. Eagle, David, 2006. "The Eventual Failure and Price Indeterminacy of Inflation Targeting," MPRA Paper 1240, University Library of Munich, Germany, revised 13 Dec 2006.
  6. Raman Uppal & Harjoat Bhamra, 2013. "Asset Prices with Heterogeneity in Preferences and Beliefs," 2013 Meeting Papers 1344, Society for Economic Dynamics.
  7. Yu Chen & Thomas Cosimano & Alex Himonas, 2010. "Continuous time one-dimensional asset-pricing models with analytic price–dividend functions," Economic Theory, Springer, vol. 42(3), pages 461-503, March.

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