Equilibrium Correlation of Asset Price and Return

Charles Leung

Discussion Papers from Chinese University of Hong Kong, Department of Economics

Abstract: Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed.

Keywords: rational expectation; price and return; serial and cross correlation; market efficiency; predictability (search for similar items in EconPapers)
JEL-codes: E30 G10 R20 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-fin and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Equilibrium Correlations of Asset Price and Return (2007)
Working Paper: Equilibrium Correlation of Asset Price and Return (2005)
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