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Equilibrium asset pricing with short rate risk

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  • Alessandro Sbuelz

    (Catholic University of Milan, Baffi-CAREFIN Fellow)

Abstract

I study the exact percentage price reaction (in absolute value) to changes in the short rate for long-lived assets in a tractable long-run risk equilibrium model with fluctuating expected growth rates. Calibration reveals that, under time-additive expected utility, perpetuities with constant coupons exhibit a larger effective duration than the absolute value of the stock price logarithmic derivative due to a mild positive comovement between short rates and expected dividend growth. Conversely, under Epstein-Zin preferences with unit elasticity of intertemporal substitution, the perpetuity’s effective duration is smaller due to a pronounced positive comovement between short rates and expected dividend growth. My findings suggest that strong persistence in fundamentals contributes to non-linearities in the equilibrium log prices of long-lived assets. (JEL Classification Code: G12). Keywords: equilibrium short rate, long-run risk, effective duration, stock pricing, perpetuity/consol pricing.

Suggested Citation

  • Alessandro Sbuelz, 2025. "Equilibrium asset pricing with short rate risk," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(1), pages 93-125, June.
    • Handle: RePEc:spr:decfin:v:48:y:2025:i:1:d:10.1007_s10203-024-00442-4
    DOI: 10.1007/s10203-024-00442-4
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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