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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.

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Abstract

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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ID Code: 8207
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: v.pavlov@qut.edu.au
Keywords: Equity premium, Overlapping generations, Incomplete markets
DOI: 10.1016/j.najef.2006.02.001
ISSN: 1062-9408
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 23:19

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