Consumption Asset Pricing with Stable Shocks: Exploring a Solution and Its Implications for the Equity Premium Puzzle

Prasad V. Bidarkota and J. Huston McCulloch
Authors registered in the RePEc Author Service: Prasad V. Bidarkota () and J. Huston McCulloch

No 70, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: We study the consumption based asset pricing model due to Lucas (1978). The exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework. The Gaussian process emerges as a special case. We derive exact analytical solutions for asset prices and returns, and provide conditions under which these exist. We also study the implications of the model for the equity premium puzzle.

Keywords: Asset pricing; Lucas model; equity premium; normal distributions; stable distributions (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2001-04-01
New Economics Papers: this item is included in nep-fin and nep-fmk
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