The return on everything and the business cycle in production economies
Christopher Heiberger () and
Daniel Fehrle ()
Additional contact information
Christopher Heiberger: University of Augsburg, Department of Economics, https://www.uni-augsburg.de/de/fakultaet/wiwi/economics/
No 338, Discussion Paper Series from Universitaet Augsburg, Institute for Economics
A The risk premium puzzle is even worse than previously reported if housing is also taken into consideration next to equity. While housing premia are only moderately smaller than equity premia, they are significantly less volatile and the Sharpe ratio of housing is significantly larger. Hence, three question arise: i) are existing approaches to explain the equity premium puzzle also capable of explaining even larger Sharpe ratios than previously required, ii) can return rates and volatilities of various assets be differentiated, and iii) can different Sharpe ratios between the two risky assets be matched. We analyze these questions, next to business cycle statistics, by including housing into seminal approaches to solve the risk premium puzzle in production economies. Non-disaster economies with habit formation, capital adjustment costs and limited factor mobility fail to generate a Sharpe ratio of housing of the empirically observed size and do not explain co-moving economic activity. A basic model with time-varying disaster risk can reproduce the large Sharpe ratio of housing. Moreover, the model can explain different means and volatilities of the risky assets, economic activity comoves and the model explains the volatility ratio of business investments, residential investments and house prices. However, the model does not allow to disentangle the Sharpe ratios of the risky assets and premia on equity remain too involatile.
Keywords: equity premium puzzle; housing; rare disasters; production CAPM; real business cycle literature (search for similar items in EconPapers)
JEL-codes: C63 E32 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
Working Paper: The return on everything and the business cycle in production economies (2020)
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:aug:augsbe:0338
Access Statistics for this paper
More papers in Discussion Paper Series from Universitaet Augsburg, Institute for Economics Universitaetsstrasse 16, D-86159 Augsburg, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Dr. Albrecht Bossert ().