Asset Pricing in a Low Rate Environment

Marlon Azinovic, Harold Cole and Felix Kubler

No 31832, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine asset prices in environments where the risk-free rate lies considerably below the growth rate. To do so, we introduce a tractable model of a production economy featuring heterogeneous trading technologies, as well as idiosyncratic and aggregate risk. We show that allowing for the possibility of firms exiting is crucial for matching key macroeconomic moments and, simultaneously, the risk-free rate, the market price of risk, and price-earnings ratios. In particular, our model allows us to consider calibrations that match the high observed market price of risk and average interest rates as low as 2-3.5 percent below the average growth rate. High values for risk aversion or non-standard preferences are not necessary for this. We use the model to examine the wealth distribution and asset prices in economies with very low real rates. We also examine under which conditions realistic calibrations allow for an infinite rollover of government debt. For our benchmark calibration, rollover is impossible even if the average risk-free rate lies 3.5 percent below the average growth rate.

JEL-codes: C6 E22 E43 E44 G12 (search for similar items in EconPapers)
Date: 2023-11
Note: EFG
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