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ASSET PRICING IN DYNAMIC STOCHASTIC GENERAL EQUILIBRIUM MODELS WITH INDETERMINACY

Published online by Cambridge University Press:  01 October 2007

NATALIA GERSHUN  and
SHARON G. HARRISON
NATALIA GERSHUN
Affiliation:
Pace University
SHARON G. HARRISON
Affiliation:
Barnard College, Columbia University
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Abstract

We explore asset pricing in the context of the one-sector Benhabib-Farmer-Guo (BFG) model with increasing returns to scale in production and compare our results with financial implications of the standard dynamic stochastic general equilibrium (DSGE) model. Our main goal is to determine the effects of local indeterminacy and the presence of sunspot shocks on asset pricing. We find that the BFG model does not adequately represent key stylized facts of U.S. capital markets and does not improve on the asset-pricing results obtained in the standard DSGE model.

Keywords

Equity PremiumVolatility PuzzleIndeterminacy
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Issue 1 , February 2008 , pp. 50 - 71
Copyright
© 2007 Cambridge University Press

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