Abstract
We have investigated the asset pricing problem in a general equi- librium in an economy with two states. Based on the assumption of a CRRA utility function, we have derived a partial dierential equation satisfied by the representative agent's cost function. In the case when the representative agent doesn't have intermediate consumption, we have found an explicit so- lution of the cost function. A closed-form expression for the riskless interest rate has been derived. We have also provided a partial dierential equation satisfied by any contingent claim. Based on the stochastic discount factor computed, we have suggested an explanation for the equity premium puzzle.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
