Habit persistence, impediments to production factor adjustments, and asset returns in general equilibrium models with self-fulfilling expectations

Natalia Gershun

Review of Financial Economics, 2010, vol. 19, issue 1, 19-27

Abstract: I examine asset returns in the context of real dynamic stochastic general equilibrium economies with multiple equilibria (indeterminacy) that allow for aggregate fluctuations due to non-fundamental belief shocks. The two models include habit formation in preferences. Model 1 combines restrictions on factor mobility and adjustment costs in a one-sector economy. Model 2 uses restrictions on factor mobility in a two-sector economy. Results demonstrate that Model 1 fails to match the stylized financial facts. Model 2 replicates the low risk-free rate and the standard deviation of the return on the risk-free asset, but underestimates the equity premium and standard deviation of the return on equity.

Keywords: Asset; pricing; Indeterminacy; Sunspots; Habit; formation; Adjustment; costs (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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