Asset prices in a Huggett economy

Per Krusell (), Toshihiko Mukoyama () and Anthony A. Smith

Journal of Economic Theory, 2011, vol. 146, issue 3, pages 812-844

Abstract: This paper explores asset pricing in economies where there is no direct insurance against idiosyncratic risks but other assets can be used for self-insurance, subject to exogenously-imposed borrowing limits. We analyze an endowment economy, based on Huggett (1993) [11], both with and without aggregate risk. Our main innovation is that we obtain full analytical tractability by studying the case with "maximally tight" borrowing constraints. We illustrate by looking at riskless bonds, equity, and the term structure of interest rates, and we show that the model can reproduce many features of observed asset prices when idiosyncratic risks are quantitatively reasonable.

Keywords: Incomplete; markets; Asset; prices; Borrowing; constraints; Equity; premium (search for similar items in EconPapers)
Date: 2011
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Working Paper: Asset Prices in a Huggett Economy (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:146:y:2011:i:3:p:812-844

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