The endogenous growth and asset prices nexus revisited with closed-form solution

Palma Filep-Mosberger and Lorant Kaszab

Finance Research Letters, 2024, vol. 68, issue C

Abstract: Endogenous growth models exhibit long-run risks, which are considered a potential explanation of the equity premium puzzle. Unlike previous literature, we use a closed-form solution of a simplified model to make the following contributions. First, we derive a set of conditions for a positive and large equity premium. Second, we match a key driver of endogenous growth, the R&D spending-to-GDP ratio. Third, we include a novel discussion on the role of patent obsolescence. Given that the literature concerns the accuracy of loglinear-lognormal solutions, we solve our model numerically with third-order perturbation. We find additional risk correction due to higher-order terms.

Keywords: Endogenous growth; Loglinear-lognormal solution; Asset pricing; Equity premium; Third-order perturbation (search for similar items in EconPapers)
JEL-codes: E13 E31 E43 E44 E62 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s154461232401016x

DOI: 10.1016/j.frl.2024.105986

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