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Asset Prices And Business Cycles Under Market Incompleteness

Author

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  • Eva Carceles

    (Universitat Pompeu Fabra)

Abstract

In the present paper we study the behavior of the macroeconomic aggregates, asset prices and dividends in a real business cycle model with household heterogeneity and incomplete financial markets due to restricted asset trade. Apart from the incompleteness of markets, a second distortion is introduced into the model due to the fact that the firm does not have the usual profit maximization objective. We find that this distortion alone is not able to generate reasonable asset return moments. When we introduce household heterogeneity, however, the performance of the model concerning asset returns is considerably improved, specially in the case with restricted equity trade, while the model is still able to replicate the basic macroeconomic business cycle facts in the data.

Suggested Citation

  • Eva Carceles, 2000. "Asset Prices And Business Cycles Under Market Incompleteness," Computing in Economics and Finance 2000 364, Society for Computational Economics.
    • Handle: RePEc:sce:scecf0:364
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    Cited by:

    1. is not listed on IDEAS
    2. Huang-Meier, Winifred & Freeman, Mark C., 2015. "Aggregate dividends and consumption smoothing," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 324-335.
    3. Carceles Poveda, Eva, 2003. "Capital adjustment costs and firm risk aversion," Economics Letters, Elsevier, vol. 81(1), pages 101-107, October.
    4. Balli, Faruk & De Bruin, Anne & Balli, Hatice Ozer & Karimov, Jamshid, 2020. "Corporate net income and payout smoothing under Shari'ah compliance," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    5. Gokmen, Gunes & Morin, Annaig, 2021. "Investment shocks and inequality dynamics," Economic Modelling, Elsevier, vol. 94(C), pages 570-579.
    6. Ivan Sutoris, 2018. "Asset Prices in a Production Economy with Long-run and Idiosyncratic Risk," Working Papers 2018/4, Czech National Bank, Research and Statistics Department.
    7. Jaccard, Ivan, 2021. "Leveraged property cycles," Working Paper Series 2539, European Central Bank.
    8. Huang-Meier, Winifred & Freeman, Mark C. & Mazouz, Khelifa, 2015. "Why are aggregate equity payouts pro-cyclical?," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 98-108.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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