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Rational Asset Prices

  • George M. Constantinides

The mean, co-variability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the stationarity of the price-dividend ratio and the (non) forecastability of the long-term dividend growth and price-dividend ratio. Recognition that idiosyncratic income shocks are uninsurable and concentrated in recessions contributes toward an explanation. Also borrowing constraints over the investors' life cycle that shift the stock market risk to the saving middle-aged consumers contribute toward an explanation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8826.

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Date of creation: Mar 2002
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Publication status: published as Constantinides, George M. "Presidential Address: Rational Asset Prices," Journal of Finance, 2002, v57(4,Aug), 1567-1591.
Handle: RePEc:nbr:nberwo:8826
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