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Quantitative Asset Pricing Implications of Endogenous Solvency Constraints

  • Fernando Alvarez
  • Urban J. Jermann

We study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. We 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. We characterize the deviations from independence of aggregate and individual income uncertainty that produce equity and term premia.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6953.

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Date of creation: Feb 1999
Date of revision:
Publication status: published as Alvarez, F. and U. J. Jermann. "Quantitative Asset Pricing Implications Of Endogenous Solvency Constructs," Review of Financial Studies, 2001, v14(4,Oct), 1117-1151.
Handle: RePEc:nbr:nberwo:6953
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  1. David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986. "Risk Premiums in the Term Structure : Evidence from Artificial Economies," Working Papers 665, Queen's University, Department of Economics.
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  11. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182 National Bureau of Economic Research, Inc.
  12. Weil, P., 1991. "Equilibrium Asset Prices with Undiversifiable Labor Income Risk," Harvard Institute of Economic Research Working Papers 1564, Harvard - Institute of Economic Research.
  13. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  14. Hua He and David M. Modest., 1992. "Market Frictions and Consumption-Based Asset Pricing," Research Program in Finance Working Papers RPF-223, University of California at Berkeley.
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