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Equity Premiums In a Small Open Economy

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Author Info
Douch, Mohamed

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Abstract

This paper studies the behaviour of asset prices in relation to consumption and other business cycle variables. While RBC models have been able to successfully explain the dynamics of macroeconomic variables, they fail to replicate similar interesting stylized facts when studying the behavior of asset prices. In an attempt to solve this shortcoming, some progress has been made in models that modify utility in order to account for habit persistence and incorporate capital adjustment costs. We have developed a framework that combines these ingredients by applying the loglinearly reduced form of the general equilibrium model and the asset pricing formula, based on the lognormality of the disturbance distribution for the small open economy case. Our ndings indicate that in a small open economy environment this kind of model fails to account for a substantial equity premium.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 876.

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Date of creation: Jun 2004
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Handle: RePEc:pra:mprapa:876

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Related research
Keywords: Equity premium; habit formation; small open economy;

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

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  5. Danthine, Jean-Pierre & Donaldson, John B. & Mehra, Rajnish, 1992. "The equity premium and the allocation of income risk," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 509-532. [Downloadable!] (restricted)
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  6. Lettau, Martin & Uhlig, Harald, 1997. "Preferences, Consumption Smoothing, and Risk Premia," CEPR Discussion Papers 1678, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  19. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
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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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  22. Rouwenhorst, K.G., 1991. "Asset Returns and Business Cycles," Papers 40, Rochester, Business - Ph.D.,.
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  24. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  25. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June. [Downloadable!] (restricted)
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  27. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
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