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Rational Asset Prices

  • George M. Constantinides

    (University of Chicago and NBER)

The mean, covariability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the stationarity of the price-dividend ratio and the (non)forecastability of the long-term dividend growth and price-dividend ratio. Recognition that idiosyncratic income shocks are uninsurable and concentrated in recessions contributes toward an explanation. Also borrowing constraints over the investors' life cycle that shift the stock market risk to the saving middle-aged consumers contribute toward an explanation. Copyright The American Finance Association 2002.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 57 (2002)
Issue (Month): 4 (08)
Pages: 1567-1591

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Handle: RePEc:bla:jfinan:v:57:y:2002:i:4:p:1567-1591
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