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Asset pricing implications of a new keynesian model

Author

Listed:
  • Bianca de Paoli

    (Bank of England and Centre for Economic Performance - Bank of England and Centre for Economic Performance)

  • Alasdair Scott
  • Olaf Weeken

Abstract

We investigate the behavior of asset prices in a typical New Keynesian macro model. Using a second-order approximation, we examine bond and equity returns, the equity risk premium, and the behavior of the real and nominal term structure. As documented in the literature, our results suggest that introducing real rigidities to the model increases risk premia. Nevertheless we that find that, in a world dominated by productivity shocks, increasing nominal rigidities reduces risk premia. Such rigidities only enhance risk premia when economic dynamics are mainly driven by monetary policy shocks. The results imply that, unlike in endowment frameworks, matching asset pricing facts in macro models will require attention to the composition of shocks, not just the specification of investor preferences.

Suggested Citation

  • Bianca de Paoli & Alasdair Scott & Olaf Weeken, 2010. "Asset pricing implications of a new keynesian model," Post-Print hal-00732761, HAL.
    • Handle: RePEc:hal:journl:hal-00732761
    DOI: 10.1016/j.jedc.2010.05.012
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    More about this item

    Keywords

    Asset prices;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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