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The Lucas Orchard

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  • Ian Martin

Abstract

This paper investigates the behavior of asset prices in an endowment economy in which a representative agent with power utility consumes the dividends of multiple assets. The assets are Lucas trees; a collection of Lucas trees is a Lucas orchard. The model generates return correlations that vary endogenously, spiking at times of disaster. Since disasters spread across assets, the model generates large risk premia even for assets with stable fundamentals. Very small assets may comove endogenously and hence earn positive risk premia even if their fundamentals are independent of the rest of the economy. I provide conditions under which the variation in a small asset’s price-dividend ratio can be attributed almost entirely to variation in its risk premium.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17563.

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Date of creation: Nov 2011
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Handle: RePEc:nbr:nberwo:17563

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References

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  1. Anna Pavlova & Roberto Rigobon, 2003. "Asset Prices and Exchange Rates," NBER Working Papers 9834, National Bureau of Economic Research, Inc.
  2. Pietro Veronesi & Lubos Pastor, 2005. "Was There a Nasdaq Bubble in the Late 1990s?," 2005 Meeting Papers 95, Society for Economic Dynamics.
  3. Campbell, John Y. & Mei, Jianping, 1993. "Where Do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk," Scholarly Articles 3353757, Harvard University Department of Economics.
  4. Pástor, Luboš & Veronesi, Pietro, 2002. "Stock Valuation and Learning about Profitability," CEPR Discussion Papers 3410, C.E.P.R. Discussion Papers.
  5. Ian Martin, 2010. "The Valuation of Long-Dated Assets," NBER Working Papers 16219, National Bureau of Economic Research, Inc.
  6. Ian Martin, 2010. "Consumption-Based Asset Pricing with Higher Cumulants," NBER Working Papers 16153, National Bureau of Economic Research, Inc.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Lucas Orchard
    by Christian Zimmermann in NEP-DGE blog on 2011-11-26 19:27:28
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Georgy Chabakauri, 2012. "Asset Pricing with Heterogeneous Investors and Portfolio Constraints," FMG Discussion Papers dp707, Financial Markets Group.
  2. Pavlova, Anna & Rigobon, Roberto, 2011. "International Macro-Finance," CEPR Discussion Papers 8218, C.E.P.R. Discussion Papers.
  3. Coeurdacier, Nicolas & Guibaud, Stéphane, 2011. "International portfolio diversification is better than you think," Journal of International Money and Finance, Elsevier, vol. 30(2), pages 289-308, March.
  4. Ian Martin, 2011. "The Forward Premium Puzzle in a Two-Country World," NBER Working Papers 17564, National Bureau of Economic Research, Inc.
  5. Tarek Alexander Hassan, 2012. "Country Size, Currency Unions, and International Asset Returns," NBER Working Papers 18057, National Bureau of Economic Research, Inc.
  6. Lundtofte, Frederik & Wilhelmsson, Anders, 2011. "Idiosyncratic Risk and Higher-Order Cumulants," Working Papers 2011:33, Lund University, Department of Economics.
  7. Tarek Alexander Hassan, 2010. "Country Size, Currency Areas, and International Asset Returns," 2010 Meeting Papers 365, Society for Economic Dynamics.
  8. Xavier Gabaix, 2008. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," NBER Working Papers 13724, National Bureau of Economic Research, Inc.
  9. Yu Chen & Thomas Cosimano & Alex Himonas, 2010. "Continuous time one-dimensional asset-pricing models with analytic price–dividend functions," Economic Theory, Springer, vol. 42(3), pages 461-503, March.
  10. Jordi Mondria, 2006. "Financial Contagion and Attention Allocation," 2006 Meeting Papers 177, Society for Economic Dynamics.
  11. Santos, Tano & Veronesi, Pietro, 2010. "Habit formation, the cross section of stock returns and the cash-flow risk puzzle," Journal of Financial Economics, Elsevier, vol. 98(2), pages 385-413, November.

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