Equilibrium Correlation of Asset Price and Return
Charles Leung ()
Discussion Papers from Chinese University of Hong Kong, Department of Economics
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)
New Economics Papers: this item is included in nep-fin and nep-mac
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Journal Article: Equilibrium Correlations of Asset Price and Return (2007)
Working Paper: Equilibrium Correlation of Asset Price and Return (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:chk:cuhkdc:00017
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