Liquidity Constraints in Production Based Asset Pricing Models
AbstractThis 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3107.
Date of creation: Sep 1989
Date of revision:
Publication status: published as William A. Brock, Blake LeBaron. "Liquidity Constraints in Production-Based Asset-Pricing Models," in R. Glenn Hubbard, editor, "Asymmetric Information, Corporate Finance, and Investment" University of Chicago Press, 1990 (1990)
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Other versions of this item:
- William A. Brock & Blake LeBaron, 1990. "Liquidity Constraints in Production-Based Asset-Pricing Models," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 231-256 National Bureau of Economic Research, Inc.
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