Quantitative asset pricing implications of endogenous solvency constraints
Abstract: The authors study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. The authors present a simple example for which efficient allocations and all equilibrium elements are characterized analytically. The main model produces large equity premia and risk premia for long-term bonds with low risk aversion and a plausibly calibrated income process. The authors characterize the deviations from independence of aggregate and individual income uncertainty that produce equity and term premia.
Keywords: Asset pricing;
File(s): File format is application/pdf https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/1999/wp99-5.pdf
Provider: Federal Reserve Bank of Philadelphia
Part of Series: Working Papers
Publication Date: 1999