Equity Returns and Business Cycles in Small Open Economies

Mohammad Reza Jahan-Parvar (), Xuan Liu () and Philip Rothman ()

MPRA Paper from University Library of Munich, Germany

Abstract: This is the fi rst paper in the literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing three modi cations to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution; (2) investment adjustment costs are assumed to make equity returns more volatile; and (3) GHH preferences are employed to smooth consumption. We also decompose the contributions of productivity, the world interest rate, and government expenditure shocks to the equity premium. Our results are based on data from Argentina, Brazil, and Chile.

Keywords: Asset Pricing; Equity Returns; Dynamic Stochastic General Equilibrium Model; Real Business Cycle; Small Open Economy. (search for similar items in EconPapers)
JEL-codes: G12 E32 G15 E44 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2009-06-25
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:15915

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