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Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model

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  • John B. Donaldson
  • Rajnish Mehra

Abstract

This paper uses recursive competitive theory to develop a general equilibrium asset pricing model. In this framework all prices and rates of return are endogenously determined, thus enabling us to analyze the effects of changes in preferences, technological uncertainty, and expectations on the structure of security prices. In particular we focus on how the market risk premium varies with changes in the underlying economic environment, an issue which other asset pricing models have chosen not to address.

Suggested Citation

  • John B. Donaldson & Rajnish Mehra, 1984. "Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 491-508.
  • Handle: RePEc:oup:restud:v:51:y:1984:i:3:p:491-508.
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    File URL: http://hdl.handle.net/10.2307/2297436
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    Citations

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    Cited by:

    1. Dominique Pepin, 2014. "Asset Prices and Risk Aversion," Papers 1403.0851, arXiv.org.
    2. John H. Cochrane, 1989. "Using Production Based Asset Pricing to Explain the Behavior of Stock Returns Over the Business Cycle," NBER Working Papers 3212, National Bureau of Economic Research, Inc.
    3. Peng, Yajun & Shawky, Hany, 1997. "Productivity shocks and capital asset pricing," International Review of Economics & Finance, Elsevier, vol. 6(3), pages 303-316.
    4. Favilukis, Jack, 2007. "Inequality, stock market participation, and the equity premium," LSE Research Online Documents on Economics 24500, London School of Economics and Political Science, LSE Library.
    5. Drees, Burkhard & Eckwert, Bernhard, 1995. "The composition of stock price indices and the excess volatility puzzle," International Review of Economics & Finance, Elsevier, vol. 4(1), pages 29-36.
    6. Basak, Suleyman, 1999. "On the fluctuations in consumption and market returns in the presence of labor and human capital: An equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 1029-1064, June.
    7. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938 Elsevier.
    8. Rajnish Mehra, 2003. "The Equity Premium: Why is it a Puzzle?," NBER Working Papers 9512, National Bureau of Economic Research, Inc.
    9. Barsky, Robert B, 1989. "Why Don't the Prices of Stocks and Bonds Move Together?," American Economic Review, American Economic Association, vol. 79(5), pages 1132-1145, December.
    10. John Y. Campbell, 1986. "Bond and Stock Returns in a Simple Exchange Model," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 785-803.
    11. Kikuchi, Tomoo, 2008. "International asset market, nonconvergence, and endogenous fluctuations," Journal of Economic Theory, Elsevier, vol. 139(1), pages 310-334, March.
    12. Ellen R. McGrattan & Edward C. Prescott, 2005. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 767-796.
    13. Kevin L. Reffett & Frank Schorfheide, 2000. "Evaluating Asset Pricing Implications of DSGE Models," Econometric Society World Congress 2000 Contributed Papers 1630, Econometric Society.
    14. Rajnish Mehra, 2013. "Asset Pricing Implications of Macroeconomic Interventions An Application to Climate Policy," NBER Working Papers 19146, National Bureau of Economic Research, Inc.
    15. Rajnish Mehra & Edward C. Prescott, 1982. "A test of the intertemporal asset pricing model," Staff Report 81, Federal Reserve Bank of Minneapolis.
    16. Shawky, Hany & Peng, Yajun, 1995. "Expected stock returns, real business activity and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 4(2-3), pages 143-154.
    17. Drees, Burkhard & Eckwert, Bernhard, 2000. "Price volatility and risk with non-separability of preferences," Mathematical Social Sciences, Elsevier, vol. 39(1), pages 21-34, January.
    18. Basak, Suleyman, 2002. "A comparative study of portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1217-1241, July.

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