The equity premium in an overlapping-generations economy
Pavlov, Vladimir (2006) The equity premium in an overlapping-generations economy. The North American Journal of Economics and Finance, 17(2), pp. 155-172.
In a recent paper, Constantinides, Donaldson and Mehra (CDM) present a convincing economic story that could simultaneously explain a high equity premium and a low risk-free rate. The argument is based on the effect of a borrowing restriction in an overlapping-generations model (OLG) with three generations. This paper investigates the effect of borrowing restrictions on the size of the equity premium in a model similar to CDM, but with a complete structure of contingent claims. The main conclusion of the analysis is that the results obtained by CDM follow from the particular market structure adopted in the model rather than the effects of the life cycle. Once the markets are completed, the equity premium and the risk-free rate in the OLG economy are identical to those obtained in a representative-agent (RA) economy.
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|Item Type:||Journal Article|
|Additional Information:||For more information, please refer to the journal's website (see hypertext link) or contact the author. Author contact details: firstname.lastname@example.org|
|Keywords:||Equity premium, Overlapping generations, Incomplete markets|
|Subjects:||Australian and New Zealand Standard Research Classification > ECONOMICS (140000)|
|Divisions:||Current > QUT Faculties and Divisions > QUT Business School|
|Copyright Owner:||Copyright 2006 Elsevier|
|Deposited On:||21 Jun 2007|
|Last Modified:||29 Feb 2012 13:19|
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