General Equilibrium with Constant Relative Risk Aversion and Vasicek Interest Rates

R. Goldstein and F. Zapatero

No 9404, Working Papers from Centro de Investigacion Economica, ITAM

Abstract: We consider a pure exchange economy consisting of a single risky asset whose dividend drift rate is modelled by an Ornstein-Uhlenbeck process, and a representative agent with power-utility who, in equilibrium, consumes the dividend paid by the risky asset. Endogenously determined interest rates are found to be of the Vasicek (1977) type. The mean and variance of the equilibrium stock price are stochastic and have mean-reverting components. A closed form solution for a standard call option is determined for the case of log-utility.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:9404

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