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Equilibrium Correlation of Asset Price and Return

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  • Charles Ka Yui 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.

Suggested Citation

  • Charles Ka Yui Leung, 2005. "Equilibrium Correlation of Asset Price and Return," Departmental Working Papers _175, Chinese University of Hong Kong, Department of Economics.
    • Handle: RePEc:chk:cuhked:_175
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    File URL: http://www.econ.cuhk.edu.hk/~discusspaper/00017.pdf
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    More about this item

    Keywords

    rational expectation; price and return; serial and cross correlation; market efficiency; predictability;
    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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