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General Properties of Rational Stock-Market Fluctuations

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  • Mele, Antonio

    (The London School of Economics and Political Science)

Abstract

Which pricing kernel restrictions are needed to make low dimensional Markov models consistent with given sets of predictions on aggregate stock-market fluctuations? This paper develops theoretical test conditions addressing this and related reverse engineering issues arising within a fairly general class of long-lived asset pricing models. These conditions solely affect the first primitives of the economy (probabilistic descriptions of the world, information structures, and preferences). They thus remove some of the arbitrariness related to the specification of theoretical models involving unobserved variables, state-dependent preferences, and incomplete markets.

Suggested Citation

  • Mele, Antonio, 2004. "General Properties of Rational Stock-Market Fluctuations," Economics Series 153, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:153
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    File URL: https://irihs.ihs.ac.at/id/eprint/1556
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    References listed on IDEAS

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    More about this item

    Keywords

    Pricing kernel restrictions; Convexity; Equilibrium volatility;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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