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Quantitative asset pricing implications of endogenous solvency constraints

Author

Listed:
  • Fernando Alvarez
  • Urban J. Jermann

Abstract

The authors study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. The authors present a simple example for which efficient allocations and all equilibrium elements are characterized analytically. The main model produces large equity premia and risk premia for long-term bonds with low risk aversion and a plausibly calibrated income process. The authors characterize the deviations from independence of aggregate and individual income uncertainty that produce equity and term premia.

Suggested Citation

  • Fernando Alvarez & Urban J. Jermann, 1999. "Quantitative asset pricing implications of endogenous solvency constraints," Working Papers 99-5, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:99-5
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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