Stock Prices Under Time-Varying Dividend Risk: an Exact Solution in an Infinite-Horizon General Equilibrium Model

30 Pages Posted: 4 Jul 2004 Last revised: 1 Sep 2010

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: June 1988

Abstract

The effects on asset prices of changes in risk are studied in a general equilibrium model in which the conditional risk evolves stochastically over time. The savings decisions of consumers take account of the fact that conditional risk is a serially correlated random variable. By restricting the specification of consumers' preferences and the stochastic specification of dividends, it is possible to obtain an exact solution for the prices of the aggregate stock and riskless one-period bonds. An increase in the conditional risk reduces the stock price if and only if the elasticity marginal utility is less than one.

Suggested Citation

Abel, Andrew B., Stock Prices Under Time-Varying Dividend Risk: an Exact Solution in an Infinite-Horizon General Equilibrium Model (June 1988). NBER Working Paper No. w2621. Available at SSRN: https://ssrn.com/abstract=439561

Andrew B. Abel (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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HOME PAGE: http://finance.wharton.upenn.edu/~abel/

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