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Equilibrium Correlations of Asset Price and Return

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  • Charles Leung

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Abstract

Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11146-007-9009-y
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 34 (2007)
Issue (Month): 2 (February)
Pages: 233-256

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Handle: RePEc:kap:jrefec:v:34:y:2007:i:2:p:233-256

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Web page: http://www.springerlink.com/link.asp?id=102945

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Keywords: Rational expectation; Price and return; Serial and cross correlation; Market efficiency; Predictability; E30; G10; R20;

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