Equilibrium Correlations of Asset Price and Return

Posted: 25 Sep 2006

See all articles by Charles Ka Yui Leung

Charles Ka Yui Leung

The Chinese University of Hong Kong (CUHK) - Department of Economics

Abstract

Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed.

Keywords: rational expectation, price and return, serial and cross correlation, market efficiency, predictability

Suggested Citation

Leung, Ka Yui Charles, Equilibrium Correlations of Asset Price and Return. Journal of Real Estate Finance and Economics, Vol. 34, No. 2, 2007. Available at SSRN: https://ssrn.com/abstract=932122

Ka Yui Charles Leung (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong
+852-2609-7158 (Phone)
+852-2603-5805 (Fax)

HOME PAGE: http://www.cuhk.edu.hk/eco/staff/kyleung

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