Stock and Bond Pricing in an Affine Economy

EFA 2002 Berlin Meetings

54 Pages Posted: 21 Feb 2002

See all articles by Steven R. Grenadier

Steven R. Grenadier

Stanford Graduate School of Business

Geert Bekaert

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

This article provides a stochastic valuation framework for bond and stock returns that builds on three different pricing traditions: affine models of the term structure, present-value pricing of equities, and consumption based asset pricing. Our model provides a more general application of the affine framework in that both bonds and equities are priced in a consistent fashion. This pricing consistency implies that term structure vairables help price stocks while stock price fundamentals help price the term structure. We illustrate our model by considering three examples that are similar in spirit to well-known pricing models that fall within our general framework: a Mehra and Prescott (1985) economy, a present value model similar to Campbell and Shiller (1988), and a model with stochastic risk aversion similar to Campbell and Cochrane (1999). The empirical performance of our models is explored, with a particular emphasis on return predictability.

Suggested Citation

Grenadier, Steven R. and Bekaert, Geert, Stock and Bond Pricing in an Affine Economy (October 2001). EFA 2002 Berlin Meetings. Available at SSRN: https://ssrn.com/abstract=299952 or http://dx.doi.org/10.2139/ssrn.299952

Steven R. Grenadier

Stanford Graduate School of Business ( email )

Graduate School of Business
Stanford, CA 94305-5015
United States
650-725-0706 (Phone)
650-725-6152 (Fax)

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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