General Equilibrium Asset Pricing Under Regime Switching

We have investigated the asset pricing problem in a general equi- librium in an economy with two states. Based on the assumption of a CRRA utility function, we have derived a partial dierential equation satisfied by the representative agent's cost function. In the case when the representative agent doesn't have intermediate consumption, we have found an explicit so- lution of the cost function. A closed-form expression for the riskless interest rate has been derived. We have also provided a partial dierential equation satisfied by any contingent claim. Based on the stochastic discount factor computed, we have suggested an explanation for the equity premium puzzle.