ASSET PRICES AND BUSINESS CYCLES UNDER MARKET INCOMPLETENESS

Eva Carceles
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Eva Carceles: Universitat Pompeu Fabra

No 364, Computing in Economics and Finance 2000 from Society for Computational Economics

Abstract: In the present paper we study the behavior of the macroeconomic aggregates, asset prices and dividends in a real business cycle model with household heterogeneity and incomplete financial markets due to restricted asset trade. Apart from the incompleteness of markets, a second distortion is introduced into the model due to the fact that the firm does not have the usual profit maximization objective. We find that this distortion alone is not able to generate reasonable asset return moments. When we introduce household heterogeneity, however, the performance of the model concerning asset returns is considerably improved, specially in the case with restricted equity trade, while the model is still able to replicate the basic macroeconomic business cycle facts in the data.

Date: 2000-07-05

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