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Asset Prices and Time-Varying Risk

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  • International Monetary Fund

Abstract

Observers have often characterized asset markets as being subject to periods of tranquility and periods of turbulence. Until recently, however, researchers were unable to produce closed-form asset pricing formulas in a model environment of time-varying risk. Some work by Abel provided us with the insights needed to produce such formulas. This paper gives a exposition of how to develop the formulas in an environment where the formulas may by obtained using a simple extension of standard tools. While the paper is intended mainly as an exposition of new work, it also contains a report on the asset market effect of fiscal reform. It is found that entering a period of weak coordination between government spending and taxing (tax rate) policy is good for stock prices.

Suggested Citation

  • International Monetary Fund, 1988. "Asset Prices and Time-Varying Risk," IMF Working Papers 1988/042, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1988/042
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