Inspecting the Mechanism: The Determination of Asset Prices in the Real Business Cycle Model

Martin Lettau

No 1884, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we derive closed-form solutions for a variety of prices for financial assets in an RBC economy. The equations are based on a loglinear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. E.g., we show that risk premia of long real bonds and equity are negative when technology shocks are permanent. Moreover, the wedge between the equity premium and the long bond premium is small and often negative. The closed-form solutions presented here are applicable to any RBC model that can be approximated in loglinear form.

Keywords: analytical solution; Asset Prices; loglinear approximation; RBC model; Risk Premia (search for similar items in EconPapers)
JEL-codes: E13 G12 (search for similar items in EconPapers)
Date: 1998-05
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Citations: View citations in EconPapers (3)

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