Bond and Stock Returns in a Simple Exchange Model
This paper studies asset pricing in a general equilibrium representative agent exchange model. The assumptions of isoelastic period utility and lognormal endowment allow the derivation of closed-form solutions for asset returns without restricting the serial correlation of the log endowment. Risk premiums on stocks and real bonds are found to be simple functions of relative risk aversion, the variance of the log endowment innovation, and the weights in the moving average representation of the log endowment. The paper analyzes the sign of term premiums, the size of the equity premium, and the effect of taste shocks on asset prices.
|Date of creation:||1986|
|Publication status:||Published in Quarterly Journal of Economics|
|Contact details of provider:|| Postal: Littauer Center, Cambridge, MA 02138|
Web page: http://www.economics.harvard.edu/
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- Thomas J. Sargent, 1971.
"Interest rates and prices in the long run: a study of the Gibson paradox,"
75, Federal Reserve Bank of Minneapolis.
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- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
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- Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311.
- LeRoy, Stephen F., 1982. "Risk-aversion and the term structure of real interest rates," Economics Letters, Elsevier, vol. 10(3-4), pages 355-361.
- Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
- Shiller, Robert J & Siegel, Jeremy J, 1977. "The Gibson Paradox and Historical Movements in Real Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 891-907, October.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1981. "A Re-examination of Traditional Hypotheses about the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 36(4), pages 769-799, September.
- Michener, Ron, 1984. "Permanent income in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 297-305, May.
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