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Equilibrium Correlations of Asset Price and Return

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  • Charles Leung

Abstract

Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Charles Leung, 2007. "Equilibrium Correlations of Asset Price and Return," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 233-256, February.
  • Handle: RePEc:kap:jrefec:v:34:y:2007:i:2:p:233-256
    DOI: 10.1007/s11146-007-9009-y
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    More about this item

    Keywords

    Rational expectation; Price and return; Serial and cross correlation; Market efficiency; Predictability; E30; G10; R20;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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