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Asset Pricing in a Low Rate Environment

Author

Listed:
  • Marlon Azinovic

    (University of Pennsylvania)

  • Harold L. Cole

    (University of Pennsylvania; National Bureau of Economic Research)

  • Felix Kübler

    (University of Zurich; Swiss Finance Institute)

Abstract

We examine asset prices in environments where the risk-free rate lies considerably below the growth rate. To do so, we introduce a tractable model of a production economy featuring heterogeneous trading technologies, as well as idiosyncratic and aggregate risk. We show that allowing for the possibility of firms exiting is crucial for matching key macroeconomic moments and, simultaneously, the risk-free rate, the market price of risk, and price-earnings ratios. In particular, our model allows us to consider calibrations that match the high observed market price of risk and average interest rates as low as 2-3.5 percent below the average growth rate. High values for risk aversion or non-standard preferences are not necessary for this. We use the model to examine the wealth distribution and asset prices in economies with very low real rates. We also examine under which conditions realistic calibrations allow for an infinite rollover of government debt. For our benchmark calibration, rollover is impossible even if the average risk-free rate lies 3.5 percent below the average growth rate.

Suggested Citation

  • Marlon Azinovic & Harold L. Cole & Felix Kübler, 2023. "Asset Pricing in a Low Rate Environment," Swiss Finance Institute Research Paper Series 23-31, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2331
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    Keywords

    Asset pricing; low rates; r-g; limited participation; market price of risk;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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