Rational Asset Prices

The mean, covariability, 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 pre...

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Bibliographic Details
Published in:The Journal of finance (New York) 2002-08, Vol.57 (4), p.1567-1591
Main Author: Constantinides, George M.
Format: Article
Language:English
Subjects:
Analytical forecasting
Consumer behavior
Consumer economics
Dividends
Economic models
Equity
Household consumption
Price premiums
Sample mean
Stock markets
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Summary:The mean, covariability, 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.
ISSN:0022-1082
1540-6261
DOI:10.1111/1540-6261.00471