Macroeconomic Foundations for Discontinuous Price Movements

66 Pages Posted: 5 Nov 1999

See all articles by Liuren Wu

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

Date Written: May 3, 1999

Abstract

This paper develops a dynamic general equilibrium asset pricing model to account for the discontinuous price movements commonly observed in the financial markets. We consider two possible sources: (1) jumps in the fundamental economy, as captured by the production technology, and (2) jumps in investors' perception of the economic risk, as captured by the intensity of jumps in the production process. The paper solves the dynamic portfolio decision problem and obtains in analytical forms the general equilibrium pricing of interest rates, bonds, and stocks. We also calibrate the model to the U.S. economy.

JEL Classification: G12, G13, E43, E44

Suggested Citation

Wu, Liuren, Macroeconomic Foundations for Discontinuous Price Movements (May 3, 1999). Available at SSRN: https://ssrn.com/abstract=174029 or http://dx.doi.org/10.2139/ssrn.174029

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

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HOME PAGE: http://faculty.baruch.cuny.edu/lwu/

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