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GENERAL EQUILIBRIUM WITH CONSTANT RELATIVE RISK AVERSION AND VASICEK INTEREST RATES 1
Author(s) -
Goldstein Robert,
Zapatero Fernando
Publication year - 1996
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/j.1467-9965.1996.tb00120.x
Subject(s) - vasicek model , economics , dividend , econometrics , interest rate , equity premium puzzle , risk aversion (psychology) , mean reversion , risk premium , expected utility hypothesis , mathematical economics , monetary economics , finance
We consider a pure exchange economy consisting of a single risky asset whose dividend drift rate is modeled as an Omstein‐Uhlenbeck process, and a representative agent with power‐utility who, in equilibrium, consumes the dividend paid by the risky asset. Endogenously determined interest rates are found to be of the Vasicek (1977) type the mean and variance of the equilibrium stock price are stochastic and have mean‐reverting components A closed‐form solution for a standard call option is determined for the case of log‐utility. Equilibrium values have interesting implications for the equity premium puzzle observed by Mehra and Prescott (1985)