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Equity Premiums In a Small Open Economy

Listed author(s):
  • Douch, Mohamed

This paper studies the behaviour of asset prices in relation to consumption and other business cycle variables. While RBC models have been able to successfully explain the dynamics of macroeconomic variables, they fail to replicate similar interesting stylized facts when studying the behavior of asset prices. In an attempt to solve this shortcoming, some progress has been made in models that modify utility in order to account for habit persistence and incorporate capital adjustment costs. We have developed a framework that combines these ingredients by applying the loglinearly reduced form of the general equilibrium model and the asset pricing formula, based on the lognormality of the disturbance distribution for the small open economy case. Our ndings indicate that in a small open economy environment this kind of model fails to account for a substantial equity premium.

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File URL: https://mpra.ub.uni-muenchen.de/876/1/MPRA_paper_876.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 876.

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Date of creation: Jun 2004
Handle: RePEc:pra:mprapa:876
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  7. Abdelhak S Senhadji, 1997. "Sources of Debt Accumulation in a Small Open Economy," IMF Working Papers 97/146, International Monetary Fund.
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  9. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June.
  10. Danthine, Jean-Pierre & Donaldson, John B. & Mehra, Rajnish, 1992. "The equity premium and the allocation of income risk," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 509-532.
  11. 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.
  12. John Y. Campbell, 1984. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
  13. 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 519-543, June.
  14. Black, Fischer, 1990. "Mean Reversion and Consumption Smoothing," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 107-114.
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  19. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  20. 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.
  21. 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.
  22. 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.
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  24. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
  25. Olivier Allais & Loic Cadiou & Stéphane Dees, 2000. "Consumption Habit and Equity Premium in the G7 Countries," Working Papers 2000-19, CEPII research center.
  26. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
  27. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  28. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
  29. 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.
  30. King, Robert G & Plosser, Charles I & Rebelo, Sergio T, 2002. "Production, Growth and Business Cycles: Technical Appendix," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 87-116, October.
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