 Asset pricing in the production economy subject to monetary shocksJournal of Economics and Business, 2011, vol. 63, issue 3, 187-216 Abstract: Abstract This paper derives approximate analytical solutions for various financial assets in the production economy with monetary shocks. Both technology and monetary shocks drive the dynamics of various financial assets. Special cases of permanent and transitory shocks are considered. The solutions based on the loglinear approximation framework allow for a decomposition of risk that comes from real and monetary sides of the economy. Equity premium, volatility of the risk-free rate, Sharpe ratio, and inflation risk premium are calibrated to quarterly historical U.S. data. The model produces a realistic Sharpe ratio and inflation risk premium for empirically reasonable values of the relative risk aversion parameter, but results in the low equity premium. Overall, the results suggest that qualitatively the real business cycle model with monetary shocks has an advantage over the real business cycle model with respect to matching the key asset pricing facts. Keywords: Real; business; cycle; models; Monetary; shocks; Equity; premium; Sharpe; ratio; Inflation; risk; premium; Volatility; of; the; risk-free; rate (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:63:y:2011:i:3:p:187-216 Access Statistics for this article Journal of Economics and Business is currently edited by Emanuele Bajo and Moritz Ritter More articles in Journal of Economics and Business from Elsevier |
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