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Limited Enforcement of Debt Contracts and Macroeconomic Implications for Asset Prices

The predictions of the canonical consumption-based asset pricing model (Lucas 1978) are not consistent with some empirical findings. In light of this, several modifications to this canonical model have been proposed: the formulation of alternative preference structures, the consideration of incomplete markets models and the introduction of other market frictions, such as transaction costs, imperfect information and imperfect enforceability of financial contracts (or limited commitment). Limited commitment results in the imposition of material constraints on borrowing. This work is aimed at analyzing Alvarez and Jermann's (2000, 2001) consumption-based asset pricing model with endogenous (not-too-tight) debt constraints under limited commitment, its asset pricing implications and its contribution to the explanation of two significant empirical findings that the canonical model could not explain: the equity premium puzzle and the less marked increase in consumption inequality relative to income inequality displayed by U.S. data (Krueger and Perri 2006).

Mostra/Nascondi contenuto.
Introduction Asset pricing is a topic of utmost interest in financial economics. Asset pricing models aim at determining the prices of financial assets such as stocks and bonds. One of the most interesting advances in asset pricing theory over the last three decades is the development of the consumption-based asset pricing model, a model that establishes a link between asset returns and macroeconomics (strictly speaking, consumption growth). Within such models, prices and returns of financial assets are determined by individuals’ consumption and saving choices, and hence by their preferences, their level of risk aversion and their degree of intertemporal substitutability. The first and canonical consumption-based asset pricing model is attrib- uted to Lucas [36]. Lucas’s model analyzes consumption and investment choices of a representative agent over an infinite horizon. In each period, the agent must decide his consumption and his investment so as to maxi- mize his expected intertemporal utility, E {∑∞ t=0 β tu(ct) } . He can invest in two types of financial assets: equity stocks, whose return is uncertain, and bonds, whose return is fixed and certain. At optimum, the loss in marginal utility incurred by sacrificing a unit of current consumption in order to pur- chase an additional unit of equity must equal the discounted expected gain in marginal utility resulting from the investment. 1

Laurea liv.II (specialistica)

Facoltà: Economia

Autore: Claudia Cerrone Contatta »

Composta da 106 pagine.


Questa tesi ha raggiunto 236 click dal 18/03/2009.

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