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Pricing Assets in a Perpetual Youth Model

Roger Farmer ()

No 485, National Institute of Economic and Social Research (NIESR) Discussion Papers from National Institute of Economic and Social Research

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.

New Economics Papers: this item is included in nep-dge
Date: 2018-01
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Journal Article: Pricing Assets in a Perpetual Youth Model (2018) Downloads
Working Paper: Pricing Assets in a Perpetual Youth Model (2018) Downloads
Working Paper: Pricing Assets in a Perpetual Youth Model (2018) Downloads
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