Consumption Asset Pricing with Stable Shocks: Exploring a Solution and Its Implications for the Equity Premium Puzzle
AbstractWe study the consumption based asset pricing model due to Lucas (1978). The exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework. The Gaussian process emerges as a special case. We derive exact analytical solutions for asset prices and returns, and provide conditions under which these exist. We also study the implications of the model for the equity premium puzzle.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 70.
Date of creation: 01 Apr 2001
Date of revision:
Contact details of provider:
Web page: http://www.econometricsociety.org/conference/SCE2001/SCE2001.html
More information through EDIRC
Asset pricing; Lucas model; equity premium; normal distributions; stable distributions;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-05-02 (All new papers)
- NEP-FIN-2001-05-02 (Finance)
- NEP-FMK-2001-05-02 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kocherlakota, N., 1995.
"The Equity Premium: It's Still a Puzzle,"
95-05, University of Iowa, Department of Economics.
- Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
- Kenneth A. Froot & Maurice Obstfeld, 1989.
"Intrinsic Bubbles: The Case of Stock Prices,"
NBER Working Papers
3091, National Bureau of Economic Research, Inc.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Burnside, Craig, 1998. "Solving asset pricing models with Gaussian shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 22(3), pages 329-340, March.
- Prasad V. Bidarkota, 2000. "Asymmetries in the Conditional Mean Dynamics of Real GNP: Robust Evidence," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 153-157, February.
- Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000.
"Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?,"
American Economic Review,
American Economic Association, vol. 90(4), pages 787-805, September.
- Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1998. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good To Be True?," NBER Working Papers 6354, National Bureau of Economic Research, Inc.
- Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.