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General equilibrium pricing with multiple dividend streams and regime switching

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  • Jia Shen
  • Robert J. Elliott

Abstract

In this paper, we investigate a regime switching Lucas economy in continuous time, with multiple dividend streams and labour income. We determine the asset prices in equilibrium in the economy with regime switching, and derive a system of partial differential equations for the asset prices and the short interest rate. The solutions for the endogenous short interest rate, the bond price and the yield of the bond are obtained. We also consider applications of the equilibrium model and show that the model implies a rich framework for the term structure of interest rates. We demonstrate how the regime switching economy helps to improve the model-implied annual excess rate of return. This assists in explaining the famous equity premium puzzle.

Suggested Citation

  • Jia Shen & Robert J. Elliott, 2015. "General equilibrium pricing with multiple dividend streams and regime switching," Quantitative Finance, Taylor & Francis Journals, vol. 15(9), pages 1543-1557, September.
    • Handle: RePEc:taf:quantf:v:15:y:2015:i:9:p:1543-1557
    DOI: 10.1080/14697688.2014.974872
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    References listed on IDEAS

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    1. Back, Kerry, 2010. "Asset Pricing and Portfolio Choice Theory," OUP Catalogue, Oxford University Press, number 9780195380613.
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    Cited by:

    1. Tomás Caravello & Turalay Kenc & Martín Sola, 2021. "Risk Aversion and Changes in Regime," Department of Economics Working Papers 2021_08, Universidad Torcuato Di Tella.

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