Asset prices,asset stocks and rational expectations

This paper explores the relationship between asset return covariances and the impact of asset stock changes on asset prices. In the process the paper reconciles recent contradictory results on the effect of changes in the stock of government debt on equity prices. A solution for asset prices in a rational expectations equilibrium is also derived. This solution has the property that at the prices implied by the solution the demand for each asset equals its supply and the distribution of future asset prices implied by the solution is identical to the distribution upon which asset holders base their demands.