Equity Premia with Benchmark Levels of Consumption: Closed-Form Results

I calculate exact expressions for risk premia, term premia, and the premium on levered equity in a framework that includes habit formation, keeping/catching up with the Joneses, and possible departures from rational expectations. Closed-form expressions for the first and second moments of returns and for the R2 of a regression of stock returns on the dividend-price ratio are derived under lognormality for the case that includes keeping/catching up with the Joneses. Linear approximations illustrate how these moments of returns are affected by parameter values and illustrate quantitatively how well the model can account for values of the equity premium, the term premium, and the standard deviations of the riskless return and the rate of return on levered equity. For empirically relevant parameter values, the linear approximations yield values of the various moments that are close to those obtained from the exact solutions.

An Exploration of the Effects of Pessimism and Doubt on Asset Returns

The subjective distribution of growth rates of aggregate consumption is characterized by pessimism if it is first-order stochastically dominated by the objective distribution. Uniform pessimism is a leftward translation of the objective distribution of the logarithm of the growth rate. The subjective distribution is characterized by doubt if it is mean-preserving spread of the objective distribution. Pessimism and doubt both reduce the riskfree rate and thus can help resolve the riskfree rate puzzle. Uniform pessimism and doubt both increase the average equity premium and thus can help resolve the equity premium puzzle.

Operative Gift and Bequest Motives

The Ricardian Equivalence Theorem, which is the proposition that changes in the timing of lump-sum taxes have no effect on assumption or capital accumulation, depends on the exist- of operative altruistic motives for intergenerational transfers. These transfers can be bequests from parents to children or gifts from children to parents. In order for the Ricardian Equivalence Theorem to hold, one of these transfer motives must be operative in the sense that the level of the transfer is not determined by a corner solution resulting from a binding non-negativity constraint This paper derives conditions that determine whether the bequest motive will be operative, the gift motive will be operative, or neither motive will be operative in a model in which consumers are altruistic toward their parents and their children.

A Stochastic Model of Investment, Marginal q and the Market Value of theFirm

This paper presents closed-form solutions for the investment and valuation of a competitive firm with a Cobb-Douglas production function and a constant elasticity adjustment cost function in the presence of stochastic prices for output and inputs. The value of the firm is a linear function of the capital stock. The optimal rate of investmentis an increasing function of the slope of the value function with respect to the capital stock (marginal q). A mean preserving spread of the distribution of future price increases investment. An increase in the scale of the random component of a price can increase, decrease or not affect the rate of investment depending on the sign of the covariance of this price with a weighted average of all prices.

Fortran Program for X-Ray Photoelectron Spectroscopy Data Reformatting

A FORTRAN program has been written for use on an IBM PC/XT or AT or compatible microcomputer (personal computer, PC) that converts a column of ASCII-format numbers into a binary-format file suitable for interactive analysis on a Digital Equipment Corporation (DEC) computer running the VGS-5000 Enhanced Data Processing (EDP) software package. The incompatible floating-point number representations of the two computers were compared, and a subroutine was created to correctly store floating-point numbers on the IBM PC, which can be directly read by the DEC computer. Any file transfer protocol having provision for binary data can be used to transmit the resulting file from the PC to the DEC machine. The data file header required by the EDP programs for an x ray photoelectron spectrum is also written to the file. The user is prompted for the relevant experimental parameters, which are then properly coded into the format used internally by all of the VGS-5000 series EDP packages

Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?

Jim Poterba finds that consumers do not spend all of their assets during retirement, and he projects that the demand for assets will remain high when the baby boomers retire. Based on his forecast of continued high demand for capital, Poterba rejects the asset market meltdown hypothesis, which predicts a fall in stock prices when the baby boomers retire. I develop a rational expectations general equilibrium model with a bequest motive and an aggegate supply curve for capital. In this model, a baby boom generates an increase in stock prices, and stock prices are rationally anticipated to fall when the baby boomers retire, even though, as emphasized by Poterba, consumers do not spend all of their assets during retirement. This finding contradicts Poterba's conclusion that continued high demand for assets by retired baby boomers will prevent a fall in the price of capital.

The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security

Is the stock market boom a result of the baby boom? This paper develops an overlapping generations model in which a baby boom is modeled as a high realization of a random birth rate, and the price of capital is determined endogenously by a convex cost of adjustment. A baby boom increases national saving and investment and thus causes an increase in the price of capital. The price of capital is meanreverting so the initial increase in the price of capital is followed by a decrease. Social Security can potentially affect national saving and investment, though in the long run, it does not affect the price of capital.Stock - Prices ; Capital