STOCK PRICE VOLATILITY, NEGATIVE AUTOCORRELATION AND THE CONSUMPTION–WEALTH RATIO: THE CASE OF CONSTANT FUNDAMENTALS

Charles Leung and Nan-Kuang Chen ()

Pacific Economic Review, 2010, vol. 15, issue 2, 224-245

Abstract: Based on infinite horizon models, previous theoretical works show that the empirical stock price movement is not justified by the changes in dividends. The present paper provides a simple overlapping generations model with constant fundamentals in which the stock price displays volatility and negative autocorrelation even without changes in dividend. The horizon of the agents matters. In addition, as in recent empirical works, the aggregate consumption–wealth ratio ‘predicts’ the asset return. Thus, this framework may be useful in understanding different stylized facts in asset pricing. Directions for future research are also discussed.

Date: 2010
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https://doi.org/10.1111/j.1468-0106.2010.00499.x

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