 The return on everything and the business cycle in production economiesDaniel Fehrle and Christopher Heiberger Economic Modelling, 2024, vol. 136, issue C Abstract: Motivated by recent empirical evidence on returns on equity, bonds, and housing, we study interactions among an economy’s total net worth, consisting of housing and equity, the business cycle, and three specific types of productivity risk: standard, long-run, and disaster. Preferences include habits or follow a generalized recursive form. Procyclical housing adjustments reduce consumption risk as residential investment determines the next-period amount of housing as a fraction of the composite consumption good. The existence of an asset that is safe in real terms and has a positive supply prevents versions with habits or long-run risk from simultaneously replicating risk premia, investment volatility, and housing demand. The disaster risk version replicates these targets. In all versions, a perfectly negative correlation between equity returns and the marginal utility of consumption places the equity Sharpe ratios in the upper bound of any Sharpe ratios (the Hansen–Jagannathan bound). Consequently, replicating Sharpe ratios of housing larger than equity is impossible. Keywords: Capital asset pricing model; Equity premium puzzle; Housing; Production CAPM; Rare disasters; Real business cycles (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:136:y:2024:i:c:s0264999324000981 DOI: 10.1016/j.econmod.2024.106742 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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