A Theory of Discount Rates

François Geerolf

No 1227, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper provides a new qualitative intuition for the existence of discount rates in asset pricing. In a class of models with financial frictions, discount rates arise across securities with similar cash flows, as apparent failures of the law of one price, whenever capital providers are heterogeneous in efficiency. The theory is shown to be a candidate explanation for some cross-sectional and time series anomalies. Discount rates vary across assets and over time, for reasons unrelated to curvature in utility functions. Although some implications are similar, this theory is different from intermediary and margin based asset pricing: for example, spreads are positive, even with only risk-neutral agents, or on securities with deterministic cash flows. Finally, macroeconomic implications of the theory for investment and employment are discussed.

Date: 2017
New Economics Papers: this item is included in nep-mac and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1227

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