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Asset Prices and Time-Varying Risk

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  • Robert Flood

Abstract

Observers have often characterized asset markets as being subject to periods of tranquility and periods of turbulence. Until recently, however, researchers were unable to produce closed-form asset pricing formulas in a model environment of time-varying risk. Some work by Abel provided us with the insights needed to produce such formulas. This paper gives an exposition of how to develop the formulas in an, environment where the formulas may be obtained using a simple extension of standard tools. While the paper is intended mainly as an exposition of new work, it also contains a report on the asset market effect of fiscal reform. IC is found that entering a period of week coordination between government spending end taxing (tax rate) policy is good for stock prices.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2780.

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Date of creation: Dec 1988
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Handle: RePEc:nbr:nberwo:2780

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  1. Andrew Abel, . "Stock Prices Under Time-Varying Dividend Risk: An Exact Solution in an Infinite-Horizon General Equilibrium Model," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 15-88, Wharton School Rodney L. White Center for Financial Research.
  2. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers, Federal Reserve Bank of Minneapolis 127, Federal Reserve Bank of Minneapolis.
  3. Robert P. Flood & Robert J. Hodrick & Paul Kaplan, 1986. "An Evaluation of Recent Evidence on Stock Market Bubbles," NBER Working Papers 1971, National Bureau of Economic Research, Inc.
  4. Flavin, Marjorie A, 1983. "Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(6), pages 929-56, December.
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