From Equity Premium Puzzle to Expectations Puzzle: A General Equilibrium Production Economy With Stochastic Habit Formation

Topics:
Investment and Capital Markets
Tags:
Bond,
Equity,
Finance,
Financial Services,
Investment,
New York University
Source:
New York University

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Overview: This paper develops a general equilibrium model for a representative agent, production economy with stochastic internal habit formation. The model describes a scale-independent economy, with a unique stochastic investment opportunity set. Local correlation between the stochastic interest rate and time-varying market price of risk can be determined endogenously and leads to correct predictions on the sign and magnitude of several major empirical puzzles in both equity and bond markets.

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Format: PDF | Size: 1,587KB | Date: May 2000 | Pages: 63

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