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Quantitative Asset Pricing Implications of Endogenous Solvency Constraints

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  • Fernando Alvarez
  • Urban J. Jermann

Abstract

The authors study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. The authors present a simple example for which efficient allocations and all equilibrium elements are characterized analytically. The main model produces large equity premia and risk premia for long-term bonds with low risk aversion and a plausibly calibrated income process. The authors characterize the deviations from independence of aggregate and individual income uncertainty that produce equity and term premia.
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Suggested Citation

  • Fernando Alvarez & Urban J. Jermann, "undated". "Quantitative Asset Pricing Implications of Endogenous Solvency Constraints," Rodney L. White Center for Financial Research Working Papers 10-99, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:10-99
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    File URL: http://finance.wharton.upenn.edu/%7Erlwctr/papers/9910.pdf
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    References listed on IDEAS

    as
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    7. Fernando Alvarez & Urban J. Jermann, 1998. "Asset Pricing when Risk Sharing is Limited by Default," NBER Working Papers 6476, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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