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Equity Returns and Business Cycles in Small Open Economies

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Author Info
Jahan-Parvar, Mohammad R.
Liu, Xuan
Rothman, Philip

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Abstract

This is the fi rst paper in the literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing three modi cations to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution; (2) investment adjustment costs are assumed to make equity returns more volatile; and (3) GHH preferences are employed to smooth consumption. We also decompose the contributions of productivity, the world interest rate, and government expenditure shocks to the equity premium. Our results are based on data from Argentina, Brazil, and Chile.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15915.

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Date of creation: 25 Jun 2009
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Handle: RePEc:pra:mprapa:15915

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Related research
Keywords: Asset Pricing; Equity Returns; Dynamic Stochastic General Equilibrium Model; Real Business Cycle; Small Open Economy.;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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