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Shaking the Tree: An Agency Theoretic Model of Asset Pricing

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Jamsheed Shorish
Stephen Spear

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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.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2003-E19.

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Handle: RePEc:cmu:gsiawp:-1602558152

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," Journal of Business, University of Chicago Press, vol. 36, pages 394. [Downloadable!]
  2. Kurt Hornik & Maxwell Stinchcombe & Halbert White, 1990. "Universal Approximation of an Unknown Mapping And Its Derivatives Using Multilayer Feedforward Networks," University of California at San Diego, Economics Working Paper Series 89-36r, Department of Economics, UC San Diego.
  3. Alberto Giovannini, 1989. "Uncertainty and Liquidity," NBER Working Papers 2296, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November. [Downloadable!] (restricted)
  5. Stock, James H, 1987. "Measuring Business Cycle Time," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1240-61, December. [Downloadable!] (restricted)
  6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  7. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar.. [Downloadable!] (restricted)
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  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  9. Giovannini, Alberto, 1989. "Uncertainty and liquidity," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 239-258, March. [Downloadable!] (restricted)
  10. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  1. Wagner, W., 2000. "Decentralized international risk sharing and governmental moral hazard," Discussion Paper 92, Tilburg University, Center for Economic Research. [Downloadable!]
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