An intemporal model of asset prices in a Markov economy with a limiting stationary distribution |
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Authors: | Kazemi HB |
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Affiliation: | Department of General Business and Finance, School of Management, University of Massachusetts, Amherst, MA01003, USA |
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Abstract: | A testable single-beta model of asset prices is presented. Ifstate variables have a long-run stationary joint dysfunction,then the rate return on a very long-term default-free discountbond will be perfectly correlated with the representative investor'smarginal utility of consumption. Thus, the covariance of anasset's return with the return on such a bond will be an appropriatemeasure of the asset's riskiness. The model can be, therefore,applied or tested even though the market portfolio or aggregateconsumption may not be observable. It also is shown that theexpected rate of return on a very long-term bond is equal toits variance. This proposition can be tested to determine whetherstate variables follow stationary processes. |
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