Bridging the Classroom Gap between Asset Pricing and Business Cycle Theory
Mike Aguilar () and
Daniel Soques ()
International Advances in Economic Research, 2015, vol. 21, issue 4, 433-452
The tools presented in the standard undergraduate economics and finance curricula are insufficient for explaining the complex dynamics of the modern U.S. economy. For instance, students of macroeconomics are not provided with a satisfactory framework for assessing how a financial shock may reverberate through the real economy, as it did during the Great Recession of 2008-2009. Similarly, students of finance are left with little guidance as to the origins of two key inputs into asset pricing models, namely cash flows and discount rates. In this article we present a unified macro-financial model to bridge the gap between the typical undergraduate treatments of asset pricing and business cycle theory. The Dynamic Empirical Macroeconomic (DyEM) model we introduce here offers several innovations, the most important of which is expanding the role of the interest rate to include term and default risk premia. We combine these elements to construct a series of discount rates that are critical for a range of present discounted value calculations. Moreover, we link economic activity to earnings growth in order to facilitate macro-based equity pricing. The paper concludes with an illustration of how the DyEM model may be used in the classroom via a cooperative learning exercise centered on the Great Recession. Copyright International Atlantic Economic Society 2015
Keywords: Dynamic Empirical Macroeconomic (DyEM) model; Great Recession; Asset pricing; Business cycle theory; Macro-finance modeling; Economic education; A22; E30; E44 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:kap:iaecre:v:21:y:2015:i:4:p:433-452:10.1007/s11294-015-9546-8
Ordering information: This journal article can be ordered from
Access Statistics for this article
International Advances in Economic Research is currently edited by Katherine S. Virgo
More articles in International Advances in Economic Research from Springer, International Atlantic Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().