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Shaking the tree: an agency-theoretic model of asset pricing

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  • Jamsheed Shorish

    ()

  • Stephen E. Spear

    ()

Abstract

In this paper, we develop an agency-theoretic extension of the Lucas asset pricing model and examine the resulting asset price dynamics. In the model, an agent of the firm can expand or contract the firm’s output and dividend payments in response to exogenous shocks, although expansions become increasingly costly for the agent to maintain. Analysis of numerical simulations shows that the time-series of equilibrium asset prices exhibits both significant time-varying conditional heteroskedasticity, and longer memory persistence. Copyright Springer-Verlag Berlin Heidelberg 2005

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Bibliographic Info

Article provided by Springer in its journal Annals of Finance.

Volume (Year): 1 (2005)
Issue (Month): 1 (01)
Pages: 51-72

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Handle: RePEc:kap:annfin:v:1:y:2005:i:1:p:51-72

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Web page: http://www.springerlink.com/link.asp?id=112370

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Keywords: Intra-firm dynamics; Agency theory; Asset pricing; Conditional heteroskedasticity; Long memory persistence; G12;

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  1. Stock, James H, 1987. "Measuring Business Cycle Time," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1240-61, December.
  2. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
  3. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
  4. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  5. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46 National Bureau of Economic Research, Inc.
  6. Alberto Giovannini, 1987. "Uncertainty and Liquidity," NBER Working Papers 2296, National Bureau of Economic Research, Inc.
  7. Higgins, Matthew L & Bera, Anil K, 1992. "A Class of Nonlinear ARCH Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 137-58, February.
  8. Giovannini, Alberto, 1989. "Uncertainty and liquidity," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 239-258, March.
  9. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  10. Stock, James H., 1987. "Measuring Business Cycle Time," Scholarly Articles 3425950, Harvard University Department of Economics.
  11. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
  12. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  14. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
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Cited by:
  1. Kelly David L. & Steigerwald Douglas G, 2004. "Private Information and High-Frequency Stochastic Volatility," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(1), pages 1-30, March.
  2. Wagner, W.B., 2000. "Decentralized International Risk Sharing and Governmental Moral Hazard," Discussion Paper 2000-92, Tilburg University, Center for Economic Research.
  3. Jean-Pierre Danthine & John B. Donaldson, 2010. "Executive Compensation: A General Equilibrium Perspective," Working Papers 2010-19, Swiss National Bank.
  4. Bo Sun, 2010. "Asset Returns with Earnings Management," 2010 Meeting Papers 5, Society for Economic Dynamics.

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