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Liquidity Constraints in Production Based Asset Pricing Models

  • William A. Brock
  • Blake LeBaron

This paper explores the time series implications of introducing credit constraints into a production based asset pricing model. Simulations are performed choosing parameter values which generate reasonable values for aggregate fluctuations. These results show that mean reversion in simulated returns series, measured by variance ration tests, is enhanced with the introduction of binding credit constraints. Without these constraints there is very little evidence of mean reversion. This is consistent with financial market data where the weak evidence for mean reversion is stronger in small firm returns. Other tests are run on the simulated series including checking the standard deviation, skewness, and kurtosis. These other tests do not show strong differences between the constrained and unconstrained firms in the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3107.

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Date of creation: Sep 1989
Date of revision:
Publication status: published as Liquidity Constraints in Production-Based Asset-Pricing Models , William A. Brock, Blake LeBaron. in Asymmetric Information, Corporate Finance, and Investment , Hubbard. 1990
Handle: RePEc:nbr:nberwo:3107
Note: ME
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  1. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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  4. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
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  6. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  7. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  8. William A. Brock, 1982. "Asset Prices in a Production Economy," NBER Chapters, in: The Economics of Information and Uncertainty, pages 1-46 National Bureau of Economic Research, Inc.
  9. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  10. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  11. Kim, Myung Jig & Nelson, Charles R & Startz, Richard, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 515-28, May.
  12. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  13. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July.
  14. De Bondt, Werner F M & Thaler, Richard H, 1989. "A Mean-Reverting Walk Down Wall Street," Journal of Economic Perspectives, American Economic Association, vol. 3(1), pages 189-202, Winter.
  15. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  16. Irwin Friend & Larry Lang, . "The Size Effect on Stock Returns: It is a Simply a Risk Effect not Adequately Reflected by the Usual Measures?," Rodney L. White Center for Financial Research Working Papers 24-87, Wharton School Rodney L. White Center for Financial Research.
  17. Brock, W.A. & Dechert, W.D. & LeBaron, B. & Scheinkman, J.A., 1995. "A Test for Independence Based on the Correlation Dimension," Working papers 9520, Wisconsin Madison - Social Systems.
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