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Inspecting the Mechanism: The Determination of Asset Prices in the Real Business Cycle Model

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  • Lettau, Martin

Abstract

In this paper, we derive closed-form solutions for a variety of prices for financial assets in an RBC economy. The equations are based on a loglinear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. E.g., we show that risk premia of long real bonds and equity are negative when technology shocks are permanent. Moreover, the wedge between the equity premium and the long bond premium is small and often negative. The closed-form solutions presented here are applicable to any RBC model that can be approximated in loglinear form.

Suggested Citation

  • Lettau, Martin, 1998. "Inspecting the Mechanism: The Determination of Asset Prices in the Real Business Cycle Model," CEPR Discussion Papers 1884, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1884
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    Citations

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    Cited by:

    1. Carceles Poveda, Eva, 2003. "Capital adjustment costs and firm risk aversion," Economics Letters, Elsevier, vol. 81(1), pages 101-107, October.
    2. Fabio ALESSANDRINI, 2003. "Introducing Capital Structure in a Production Economy: Implications for Investment, Debt and Dividends," Cahiers de Recherches Economiques du Département d'économie 03.03, Université de Lausanne, Faculté des HEC, Département d’économie.
    3. Peter Woehrmann & Willi Semmler & Martin Lettau, "undated". "Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models," IEW - Working Papers 225, Institute for Empirical Research in Economics - University of Zurich.

    More about this item

    Keywords

    analytical solution; Asset Prices; loglinear approximation; RBC model; Risk Premia;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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