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- Title
Inspecting The Mechanism: Closed-Form Solutions For Asset Prices In Real Business Cycle Models.
- Authors
Lettau, Martin
- Abstract
We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent.
- Subjects
BUSINESS cycles; PRICES; ASSETS (Accounting); BOND insurance
- Publication
Economic Journal, 2003, Vol 113, Issue 489, p550
- ISSN
0013-0133
- Publication type
Article
- DOI
10.1111/1468-0297.t01-1-00147