A Fact of Life: Predictable Returns from an Equilibrium Model with Simple Fundamentals

68 Pages Posted: 12 Sep 2002

See all articles by Neal Maroney

Neal Maroney

University of New Orleans - College of Business Administration

Aris Protopapadakis

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: July 2002

Abstract

We show that even when "fundamentals" are i.i.d., a three-period OLG competitive model produces negatively autocorrelated expected returns, market risk premia, and prices. This negative autocorrelation arises out of market interactions between consumers that are ex-ante identical but differ by age. Conventional benchmark models do not exhibit any autocorrelation in such an i.i.d. world. The negative autocorrelation is pervasive in the model, and it remains regardless of the correlation structure of the "fundamentals". The generally agreed-upon properties of efficient markets depend heavily on conclusions from infinitely-lived representative consumer models. But these conclusions do not generalize to more complex trading environments.

Suggested Citation

Maroney, Neal and Protopapadakis, Aris, A Fact of Life: Predictable Returns from an Equilibrium Model with Simple Fundamentals (July 2002). Available at SSRN: https://ssrn.com/abstract=330341 or http://dx.doi.org/10.2139/ssrn.330341

Neal Maroney

University of New Orleans - College of Business Administration ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States

Aris Protopapadakis (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6537 (Phone)
213-740-6650 (Fax)

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