Rational Asset Prices

43 Pages Posted: 8 Mar 2002 Last revised: 26 Oct 2010

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

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Date Written: March 2002

Abstract

The mean, co-variability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the stationarity of the price-dividend ratio and the (non) forecastability of the long-term dividend growth and price-dividend ratio. Recognition that idiosyncratic income shocks are uninsurable and concentrated in recessions contributes toward an explanation. Also borrowing constraints over the investors' life cycle that shift the stock market risk to the saving middle-aged consumers contribute toward an explanation.

Suggested Citation

Constantinides, George M., Rational Asset Prices (March 2002). NBER Working Paper No. w8826, Available at SSRN: https://ssrn.com/abstract=303548

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