Pricing Assets in a Perpetual Youth Model

Roger Farmer

No 24261, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset price volatility.

JEL-codes: E0 G1 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP EFG ME
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Citations: View citations in EconPapers (15)

Published as Roger E.A. Farmer, 2018. "Pricing assets in a perpetual youth model," Review of Economic Dynamics, .

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Journal Article: Pricing Assets in a Perpetual Youth Model (2018)
Working Paper: Pricing Assets in a Perpetual Youth Model (2018)
Working Paper: Pricing Assets in a Perpetual Youth Model (2018)
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