Asset pricing from primitives: closed form solutions to asset prices, consumption, and portfolio demands [An article from: Journal of Economic Dynamics and Control]

This digital document is a journal article from Journal of Economic Dynamics and Control, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
We derive closed-form solutions to asset prices, consumption, and portfolio demands in a discrete time, infinite horizon, incomplete markets, multiple agent economy. The closed-form solutions are in terms of the primitives, i.e., endowments, dividend, preference parameters, and exogenous probabilities. We assume individuals have constant absolute risk aversion utility, endowments and the dividend processes follow random walks with drifts, and the shocks to these processes are normally distributed. We evaluate how changes to primitives affect the equity premium, Sharpe ratio, and risk-free interest rate. A short calibration section ensues to evaluate the model.