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Equilibrium Correlation of Asset Price and Return

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  • Charles Ka Yui Leung

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.

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File URL: http://www.econ.cuhk.edu.hk/~discusspaper/00017.pdf
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Bibliographic Info

Paper provided by Chinese University of Hong Kong, Department of Economics in its series Departmental Working Papers with number _175.

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Date of creation: Nov 2005
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Handle: RePEc:chk:cuhked:_175

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Keywords: rational expectation; price and return; serial and cross correlation; market efficiency; predictability;

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