AN INTERTEMPORAL ASSET PRICING MODEL WITH STOCHASTIC CONSUMPTION AND INVESTMENT OPPORTUNITIES

Douglas T. Breeden
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Douglas T. Breeden: Stanford University, Stanford, CA 94305, USA

Chapter 3 in Theory of Valuation, 2005, pp 53-96 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis paper derives a single-beta asset pricing model in a multi-good, continuous-time model with uncertain consumption-goods prices and uncertain investment opportunities. When no riskless asset exists, a zero-beta pricing model is derived. Asset betas are measured relative to changes in the aggregate real consumption rate, rather than relative to the market. In a singlegood model, an individual's asset portfolio results in an optimal consumption rate that has the maximum possible correlation with changes in aggregate consumption. If the capital markets are unconstrained Pareto-optimal, then changes in all individuals' optimal consumption rates are shown to be perfectly correlated.

Keywords: Asset Pricing; Financial Theory; Valuation; Term Structure; Interest Rates; Options; Portfolios; Taxes; Transaction Costs (search for similar items in EconPapers)
Date: 2005
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