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A Linkage Between The Financial And The Real Economy

Author

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  • SEBASTIÃ N A. REY

    (Centro de Investigación en Métodos, Cuantitativos Aplicados a la Economía y la Gestión, Facultad de Ciencias Económicas, Universidad de Buenos Aires, Av. Córdoba 2122 C1120AAQ, Ciudad de Buenos Aires, Argentina)

Abstract

The aim of this paper is to present a linkage between the real economy (micro and macro) and the financial economy. This relationship is obtained from the non-arbitrage valuation of equities framework. The paper also investigates if this theoretical relationship is actually observed. For this purpose, it proposes and tests an empirical model for excess returns that includes the linkage as a crucial element. The actual observation of the linkage could be of special importance for the financial economics discipline, since it presents several features that are not usually seen in other asset pricing or macro-finance models: (a) the relationship is explicit and does not depend on the estimation of free parameters; (b) it is derived under arbitrage free arguments and does not introduce subjective concepts as utility function or risk aversion; and (c) it explains the observed level of equity risk premium without entering in contradiction with its theoretical foundations. The conclusions of the performed tests are in favor of the concepts provided by the framework, meaning that further research could offer an alternative understanding of the behavior of financial markets and their connection with the real economy.

Suggested Citation

  • Sebastiã N A. Rey, 2022. "A Linkage Between The Financial And The Real Economy," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-33, September.
    • Handle: RePEc:wsi:afexxx:v:17:y:2022:i:03:n:s201049522250021x
    DOI: 10.1142/S201049522250021X
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