Inspecting The Mechanism: Closed-Form Solutions For Asset Prices In Real Business Cycle Models
We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent. Copyright 2003 Royal Economic Society.
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Volume (Year): 113 (2003)
Issue (Month): 489 (07)
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