Abstract
A dynamic general equilibrium model of capital asset pricing is constructed in which the volume of capital traded is determined endogenously. The model also gives rise to a novel asset pricing formula. It is shown that temporary shocks can give rise to serially correlated changes in the price of capital and transaction volume that persist long after the initial disturbance. The frequency and amplitude of the resulting cycles are related to the length of the agent's planning horizon and the discount factor. The model's implications for explaining asset price volatility are also explored.
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