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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27343
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| Title: | Asset Pricing in a Neoclassical Model with Limited Participation |
| Authors: | Dai, Qiang |
| Issue Date: | 19-Sep-2001 |
| Series/Report no.: | S-MF-01-02 |
| Abstract: | In this paper, I show that habit formation is perhaps not what it is
commonly perceived to be: an extension of preference specification for
the representative agent. Rather, it captures a dynamic interaction
between aggregate financial income and aggregate labor income. I also
show that existing specifications of consumption habit can be extended
to incorporate a stochastic shock, which is interpreted as the labor
income shock. As a result of these two innovations, I show that a habit
formation model can explain the equity premium, equity volatility, and
risk free rate puzzles simultaneously, and provide an equilibrium
justification for the predictability of equity and bond returns by
dividend/pride ration and term spreads - all in terms of observable
sample moments of aggregate dividend income and labor income growth
rates and reasonable values of risk aversion coefficient and the
subjective discount rate. To substantiate these claims, I present an
extension of the Breeden-Lucas CCAPM by incorporating a particular form
of heterogeneity assumption and a particular form of limited
participation assumption. The resulting model features a richer
technological specification (from the perspective of a production
economy) or a richer standard assumptions of constant relative risk
aversion, complete markets, and frictionless trading from the
perspective of the marginal investor. |
| URI: | http://hdl.handle.net/2451/27343 |
| Appears in Collections: | Macro Finance
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