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Equity Premiums In Small Open Economy

  • Douch, Mohamed

It is now well known that the RBC models have enjoyed successful results in explaining the dynamics of the business cycle variables but fail to replicate similar interesting stylized facts while studying the behavior of asset prices. One line of progress for solving this shortcoming has been to modify utility to account for habit persistence and to incorporate capital adjustment costs. This paper study a small open economy general equilibrium model along with asset pricing formula based on the lognormality of the disturbance distribution. Our results stipulate that extending models with habit forming preferenses and capital adjustment cost fails to account for a substantial equity premium in a small open economy environment.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14613.

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Date of creation: Jun 2004
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Handle: RePEc:pra:mprapa:14613
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  1. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
  2. Lettau, M. & Uhlig, H.F.H.V.S., 1997. "Preferences, Consumption Smoothing and Risk Premia," Discussion Paper 1997-60, Tilburg University, Center for Economic Research.
  3. Bennett T McCallum & Edward Nelson, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimising Agents and Sticky Prices," Discussion Papers 05, Monetary Policy Committee Unit, Bank of England.
  4. Kandel, Shmuel & Stambaugh, Robert F., 1991. "Asset returns and intertemporal preferences," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 39-71, February.
  5. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  6. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  7. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  8. John Y. Campbell, 1987. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
  9. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  10. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  11. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  13. Danthine, J.P. & Donaldson, J.B. & Mehra, R., 1992. "The Equity Premium and the Allocation of Income Risk," Papers 92-09, Columbia - Graduate School of Business.
  14. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  15. Olivier Allais & Loic Cadiou & Stéphane Dees, 2000. "Consumption Habit and Equity Premium in the G7 Countries," Working Papers 2000-19, CEPII research center.
  16. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
  17. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1995. "Asset pricing lessons for modeling business cycles," Working Papers 560, Federal Reserve Bank of Minneapolis.
  18. Lettau, Martin & Uhlig, Harald, 1997. "Preferences, Consumption Smoothing, and Risk Premia," CEPR Discussion Papers 1678, C.E.P.R. Discussion Papers.
  19. Rouwenhorst, K.G., 1991. "Asset Returns and Business Cycles," Papers 40, Rochester, Business - Ph.D.,.
  20. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  21. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  22. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
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  24. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
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  26. Marc-André Letendre, 2004. "Capital utilization and habit formation in a small open economy model," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 721-741, August.
  27. A. Senhadji Semlali, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 97/146, International Monetary Fund.
  28. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  29. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
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  31. repec:dgr:kubcen:199760 is not listed on IDEAS
  32. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December.
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