The Time Series of the Cross Section of Asset Prices
65 Pages Posted: 20 Sep 2002 Last revised: 10 Mar 2022
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The Time Series of the Cross Section of Asset Prices
Date Written: September 2002
Abstract
In this paper we propose a general equilibrium model that successfully reproduces the historical experience of the cross section of US stock prices as well as the realized history of the market portfolio. The model achieves this while addressing traditional concerns in the asset pricing literature: A high equity premium and volatility of returns, the long horizon predictability, and a low volatility of the risk free rate. The model combines a rich payoff structure with a habit persistence discount factor, which allows us to identify the effect on prices of idiosyncratic cash flow shocks versus business cycle components.
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