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Habit persistence, impediments to production factor adjustments, and asset returns in general equilibrium models with self-fulfilling expectations

  • Gershun, Natalia
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    I examine asset returns in the context of real dynamic stochastic general equilibrium economies with multiple equilibria (indeterminacy) that allow for aggregate fluctuations due to non-fundamental belief shocks. The two models include habit formation in preferences. Model 1 combines restrictions on factor mobility and adjustment costs in a one-sector economy. Model 2 uses restrictions on factor mobility in a two-sector economy. Results demonstrate that Model 1 fails to match the stylized financial facts. Model 2 replicates the low risk-free rate and the standard deviation of the return on the risk-free asset, but underestimates the equity premium and standard deviation of the return on equity.

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    Article provided by Elsevier in its journal Review of Financial Economics.

    Volume (Year): 19 (2010)
    Issue (Month): 1 (January)
    Pages: 19-27

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    Handle: RePEc:eee:revfin:v:19:y:2010:i:1:p:19-27
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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