Pricing Assets in a Perpetual Youth Model

Roger Farmer

Review of Economic Dynamics, 2018, vol. 30, 106-124

Abstract: This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility. (Copyright: Elsevier)

Keywords: Asset prices; Equity premium; Sunspots (search for similar items in EconPapers)
JEL-codes: E0 G1 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (15)

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Working Paper: Pricing Assets in a Perpetual Youth Model (2018)
Working Paper: Pricing Assets in a Perpetual Youth Model (2018)
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DOI: 10.1016/j.red.2018.04.003

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