Bond and Stock Returns in a Simple Exchange Model
In this paper I analyze a simple "representative agent" exchange model of general equilibrium, and derive closed form solutions for returns on stocks and real and nominal bonds. The model restricts the representative agent's utility function to be time-separable with isoelastic period utility, and the endowment to be conditionally lognormal. These assumptions allow me to examine a general stationary stochastic process for the log of the endowment. Money and nominal prices are modelled by means of a Clower constraint. Risk premia on stocks and real and nominal discount bonds are simple functions of the coefficient of relative risk aversion, the variance of the innovation to the log endowment, and the weights in the moving average representation of the log endowment. One-period holding premia on real bonds may be positive or negative, but the limit as maturity increases is positive. When the money supply is deterministic, stocks and nominal bonds are perfect substitutes. Their expected returns to maturity are higher than those on real bonds of equal maturity, but need not be higher over other holding periods. Nominal interest rates vary positively with prices (the "Gibson paradox") if the coefficient of relative risk aversion is greater than one. In the last section of the paper I consider random shocks to the agent's utility function. These shocks may generate risk premia even when the agent is risk-neutral.
|Date of creation:||Nov 1984|
|Publication status:||published as Campbell, John Y. "Bond and Stock Returns in a Simple Exchange Model," Quarterly Journal of Economics," Vol. 101, No. 4, (November 1986) pp. 785-803.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
- 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.
- John B. Donaldson & Rajnish Mehra, 1984. "Comparative Dynamics of an Equilibrium Intertemporal Asset Pricing Model," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 491-508.
- Sargent, Thomas J, 1973. "Interest Rates and Prices in the Long Run: A Study of the Gibson Paradox," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 385-449, Part II F.
- Thomas J. Sargent, 1971. "Interest rates and prices in the long run: a study of the Gibson paradox," Working Papers 75, Federal Reserve Bank of Minneapolis.
- 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.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- LeRoy, Stephen F., 1982. "Risk-aversion and the term structure of real interest rates," Economics Letters, Elsevier, vol. 10(3-4), pages 355-361.
- Michener, Ronald W, 1982. "Variance Bounds in a Simple Model of Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 166-175, February.
- Michener, Ron, 1984. "Permanent income in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 297-305, May.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- 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.
- LeRoy, Stephen F., 1983. "Risk-aversion and the term structure of real interest rates correction," Economics Letters, Elsevier, vol. 12(3-4), pages 339-340.
- Mankiw, N. Gregory, 1981. "The permanent income hypothesis and the real interest rate," Economics Letters, Elsevier, vol. 7(4), pages 307-311. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1509. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.