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

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  • Gershun, Natalia

Abstract

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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  • Gershun, Natalia, 2010. "Habit persistence, impediments to production factor adjustments, and asset returns in general equilibrium models with self-fulfilling expectations," Review of Financial Economics, Elsevier, vol. 19(1), pages 19-27, January.
  • Handle: RePEc:eee:revfin:v:19:y:2010:i:1:p:19-27
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    Cited by:

    1. Huang-Meier, Winifred & Freeman, Mark C., 2015. "Aggregate dividends and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 324-335.
    2. Huang-Meier, Winifred & Freeman, Mark C. & Mazouz, Khelifa, 2015. "Why are aggregate equity payouts pro-cyclical?," Journal of Macroeconomics, Elsevier, pages 98-108.

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