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An Adjustment Cost Model of Asset Pricing

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Author Info
Basu, Parantap
Abstract

An intertemporal asset-pricing model is constructed incorporating an explicit adjustment-cost technology. The capital stock can be altered by investment, but there are adjustment costs whi ch lower the marginal return of investment. In a model involving an i nfinitely-lived representative agent, it is shown how changes in adju stment costs influence asset prices, the term structure of real inter est rates, and risk premia. The results suggest that adjustment cost, by causing an intertemporal consumption substitution, raises the pri ces of risky stocks and risk premia and reduces long-term real intere st rates. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 28 (1987)
Issue (Month): 3 (October)
Pages: 609-21
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Handle: RePEc:ier:iecrev:v:28:y:1987:i:3:p:609-21

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  1. Andrew B. Abel, 2001. "On the Invariance of the Rate of Return to Convex Adjustment Costs," NBER Working Papers 8649, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. John Geanakoplos & Michael Magill & Martine Quinzii, 2002. "Demography and the Long-run Predictability of the Stock Market," Cowles Foundation Discussion Papers 1380R, Cowles Foundation, Yale University, revised Jul 2004. [Downloadable!]
    Other versions:
  3. Andrew B. Abel, 2002. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," NBER Working Papers 9210, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Michael T. Kiley, 2001. "An analytical approach to the welfare cost of business cycles and the benefit from activist monetary policy," Finance and Economics Discussion Series 2001-41, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. John Geanakoplos & Michael Magill & Martine Quinzii, 2004. "Demography and the Long Run Behavior of the Stock Market," Levine's Bibliography 122247000000000643, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Parantap Basu & Christoph Thoenissen, 2007. " Investment Frictions and the Relative Price of Investment Goods in an Open Economy Model," CDMA Working Paper Series 0704, Centre for Dynamic Macroeconomic Analysis, revised Aug 2007. [Downloadable!]
  7. Basu, Parantap & Gillman, Max & Pearlman, Joseph, 2009. "Inflation, Human Capital and Tobin's q," Cardiff Economics Working Papers E2009/16, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
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