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Equity Premiums In Small Open Economy

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Author Info
Douch, Mohamed

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Abstract

It is now well known that the RBC models have enjoyed successful results in explaining the dynamics of the business cycle variables but fail to replicate similar interesting stylized facts while studying the behavior of asset prices. One line of progress for solving this shortcoming has been to modify utility to account for habit persistence and to incorporate capital adjustment costs. This paper study a small open economy general equilibrium model along with asset pricing formula based on the lognormality of the disturbance distribution. Our results stipulate that extending models with habit forming preferenses and capital adjustment cost fails to account for a substantial equity premium in a small open economy environment.

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File URL: http://mpra.ub.uni-muenchen.de/14613/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14613.

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Date of creation: Jun 2004
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Handle: RePEc:pra:mprapa:14613

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Related research
Keywords: Asset pricing; Equity premium; habit formation; small open economy JEL classification: G15; G12; C63; F41;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  20. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November. [Downloadable!] (restricted)
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  21. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October. [Downloadable!] (restricted)
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    Other versions:
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