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Asset Prices in a Huggett Economy


  • Toshihiko Mukoyama

    (University of Virginia)

  • Anthony A. Smith

    (Jr., Yale University)

  • Per Krusell

    (Princeton University)


This paper explores the asset-price implications in economies where there is no direct insurance against idiosyncratic risks but there are other assets---such as a riskfree bond or equity---that can be used for self-insurance, subject to exogenously imposed borrowing limits. We analyze an economy without production---an endowment economy---and we consider both the case with no aggregate risk and the case with aggregate risk. Thus, we analyze the economy originally studied, in the case without aggregate risk, in Huggett (1993). Our main innovation is that, by studying the case with ``maximally tight'' borrowing constraints, we can obtain full analytical tractability. Thus, like in Lucas's seminal asset-pricing paper, we obtain closed forms for all state-contingent claims, allowing us to study the price determination for all assets with payoffs contingent on aggregate events. In the Huggett economy, like in Lucas's, any asset pricing is obtained using a first-order condition, but in the Huggett economy only a subset of the consumers will typically have first-order constraints holding with equality---the others are borrowing-constrained. Thus, the analysis centers around who prices the assets, and around what the endowment risks of this agent are; in the Lucas economy, only the aggregate endowment risk matters. Moreover, identity/type of the consumer pricing an asset may change over time. We specifically illustrate by looking at riskless bonds, equity, and the term structure of interest rates.

Suggested Citation

  • Toshihiko Mukoyama & Anthony A. Smith & Per Krusell, 2008. "Asset Prices in a Huggett Economy," 2008 Meeting Papers 181, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:181

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    References listed on IDEAS

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    Cited by:

    1. Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
    2. Ricardo Reis & Alisdair McKay, 2015. "Optimal Automatic Stabilizers," 2015 Meeting Papers 608, Society for Economic Dynamics.
    3. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2015. "The Welfare Cost Of Inflation Risk Under Imperfect Insurance," PSE Working Papers hal-01157168, HAL.
    4. Lütticke, Ralph & Bayer, Christian & Pham, Lien & Tjaden, Volker, 2013. "Household Income Risk, Nominal Frictions, and Incomplete Markets," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79868, Verein für Socialpolitik / German Economic Association.
    5. Ravn, Morten O. & Sterk, Vincent, 2017. "Job uncertainty and deep recessions," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 125-141.
    6. François Legrand & Xavier Ragot, 2016. "Optimal policy with heterogeneous agents and aggregate shocks : An application to optimal public debt dynamics," 2016 Meeting Papers 1272, Society for Economic Dynamics.
    7. François Grand & Xavier Ragot, 2016. "Incomplete markets and derivative assets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(3), pages 517-545, August.
    8. Cordoba, Juan Carlos & Liu, Xiying, 2014. "Altruism, Fertility and Risk," Staff General Research Papers Archive 37481, Iowa State University, Department of Economics.
    9. Liu, Xiying, 2015. "Optimal population and policy implications," ISU General Staff Papers 201501010800005546, Iowa State University, Department of Economics.
    10. Alisdair McKay & Emi Nakamura & Jón Steinsson, 2016. "The Discounted Euler Equation: A Note," NBER Working Papers 22129, National Bureau of Economic Research, Inc.
    11. Corbae, Dean & Marimon, Ramon, 2011. "Introduction to Incompleteness and Uncertainty in Economics," Journal of Economic Theory, Elsevier, vol. 146(3), pages 775-784, May.
    12. Xavier Ragot & Francois Le Grand, 2010. "Prices and volumes of options: A simple theory of risk sharing when markets are incomplete," 2010 Meeting Papers 300, Society for Economic Dynamics.
    13. Xavier Ragot & Francois Le Grand, 2017. "Optimal Fiscal Policy with Heterogeneous Agents and Aggregate Shocks," 2017 Meeting Papers 969, Society for Economic Dynamics.
    14. repec:udc:esteco:v:44:y:2017:i:1:p:105-119 is not listed on IDEAS
    15. Tiago Berriel & Rodrigo Abreu, 2015. "Long Term Debt and Credit Crisis in a Liquidity Constrained Economy," Textos para discussão 644, Department of Economics PUC-Rio (Brazil).
    16. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    17. Alin OPREANA & Simona VINEREAN, 2015. "Analysis of the Economic Research Context after the Outbreak of the Economic Crisis of 2007-2009," Expert Journal of Economics, Sprint Investify, vol. 3(1), pages 77-92.
    18. repec:hal:wpaper:hal-01157168 is not listed on IDEAS
    19. Bilbiie, Florin Ovidiu, 2017. "The New Keynesian Cross: Understanding Monetary Policy with Hand-to-Mouth Households," CEPR Discussion Papers 11989, C.E.P.R. Discussion Papers.

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