Asset Prices and Business Cycles under Market Incompleteness

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Asset Prices and Business Cycles under Market Incompleteness

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Eva Carceles-Poveda (SUNY Stony Brook)

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Eva Carceles-Poveda

Abstract

In this paper, we study the quantitative implications of a real business cycle model where the firm is the capital owner, households are heterogeneous, and markets are incomplete due to restricted asset trade. Since, under these assumptions, the usual firm objective is no longer well defined, several non-standard objectives are incorporated into the model. These include variants of market value maximization and a utility function for the firm. We find that the presence of market incompleteness alters little the behavior of asset returns. On the other hand, the behavior of the macroeconomic aggregates is quite sensitive to the firm objective, which affects the capital accumulation path. In contrast to conventional findings, capital is not necessarily higher when markets are incomplete. In addition, the different capital accumulation effects imply that shareholders with different asset wealth might prefer different firm objectives. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 3 (July)
Pages: 405-422
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Handle: RePEc:red:issued:05-114

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Software
- Eva Carceles-Poveda, 2008. "Code and data files for "Asset Prices and Business Cycles under Market Incompleteness"," Computer Codes 05-114, Review of Economic Dynamics. [Downloadable!]

Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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