Farmer, Roger E. A. (2018) Pricing assets in a perpetual youth model. Review of Economic Dynamics, 30 . pp. 106-124. doi:10.1016/j.red.2018.04.003

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Abstract

This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price–earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Econometric models, Computable general equilibrium models, Time-series analysis
Journal or Publication Title:	Review of Economic Dynamics
Publisher:	Elsevier
ISSN:	1094-2025
Official Date:	October 2018
Dates:	Date Event October 2018 Published 24 April 2018 Available 10 April 2018 Accepted
Date of first compliant deposit:	25 April 2018
Volume:	30
Page Range:	pp. 106-124
DOI:	10.1016/j.red.2018.04.003
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
Related URLs:	Publisher

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