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Liquidity Constraints in Production Based Asset Pricing Models

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  • William A. Brock
  • Blake LeBaron

Abstract

This paper explores the time series implications of introducing credit constraints into a production based asset pricing model. Simulations are performed choosing parameter values which generate reasonable values for aggregate fluctuations. These results show that mean reversion in simulated returns series, measured by variance ration tests, is enhanced with the introduction of binding credit constraints. Without these constraints there is very little evidence of mean reversion. This is consistent with financial market data where the weak evidence for mean reversion is stronger in small firm returns. Other tests are run on the simulated series including checking the standard deviation, skewness, and kurtosis. These other tests do not show strong differences between the constrained and unconstrained firms in the model.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3107.

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Date of creation: Sep 1989
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Publication status: published as Liquidity Constraints in Production-Based Asset-Pricing Models , William A. Brock, Blake LeBaron. in Asymmetric Information, Corporate Finance, and Investment , Hubbard. 1990
Handle: RePEc:nbr:nberwo:3107

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  1. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  2. Kim, Myung Jig & Nelson, Charles R & Startz, Richard, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 515-28, May.
  3. Barsky, Robert B & Miron, Jeffrey A, 1989. "The Seasonal Cycle and the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 503-34, June.
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  5. De Bondt, Werner F M & Thaler, Richard H, 1989. "A Mean-Reverting Walk Down Wall Street," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(1), pages 189-202, Winter.
  6. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
  7. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, Elsevier, vol. 19(1), pages 3-29, September.
  8. Brock, William A., 1980. "Asset Prices in a Production Economy," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 275, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
  10. Brock, W.A. & Dechert, W.D. & LeBaron, B. & Scheinkman, J.A., 1995. "A Test for Independence Based on the Correlation Dimension," Working papers, Wisconsin Madison - Social Systems 9520, Wisconsin Madison - Social Systems.
  11. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
  12. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, American Finance Association, vol. 40(3), pages 793-805, July.
  13. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 557-81, July.
  14. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(2-3), pages 195-232.
  15. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  16. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
  17. Irwin Friend & Larry Lang, . "The Size Effect on Stock Returns: It is a Simply a Risk Effect not Adequately Reflected by the Usual Measures?," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 24-87, Wharton School Rodney L. White Center for Financial Research.
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Cited by:
  1. Calomiris, Charles W. & Love, Inessa & Martínez Pería, María Soledad, 2012. "Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(4), pages 743-765.
  2. Simon van Norden & Huntley Schaller, 2002. "Fads or bubbles?," Empirical Economics, Springer, Springer, vol. 27(2), pages 335-362.
  3. Simon van Norden & Huntley Schaller & ), 1995. "Speculative Behaviour, Regime-Switching, and Stock Market Crashes," Econometrics, EconWPA 9502003, EconWPA.
  4. Alan J. Marcus, 1989. "An Equilibrium Theory of Excess Volatility and Mean Reversion in Stock Market Prices," NBER Working Papers 3106, National Bureau of Economic Research, Inc.

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