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A general equilibrium approach to the stock returns and real activity relationship

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  • Rodríguez, Rosa
  • Restoy, Fernando
  • Peña, Juan Ignacio

Abstract

This paper brings together two separate and important topics in finance: the predictability of aggregated stock returns and the intertemporal asset pricing models. We present empirical evidence about the predictability of stock returns with a sample of OECD economies and investigate whether such evidence is consistent with a simple general equilibrium model. Our framework allow us to formalize the extensively documented empirical relationship between asset returns and real activity. The principal parameters in this relationship are the relative risk aversion and the elasticity of intertemporal substitution for the first moment of the returns and only the elasticity of substitution for the second moments. Except for the United States annual case, the puzzle of volatility remains in our model.

Suggested Citation

  • Rodríguez, Rosa & Restoy, Fernando & Peña, Juan Ignacio, 1997. "A general equilibrium approach to the stock returns and real activity relationship," DEE - Working Papers. Business Economics. WB 7028, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:7028
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    References listed on IDEAS

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