Asset Pricing Models with Production

Abstract

Asset pricing models for production economies have been studied on the basis of stochastic growth models. A prototype stochastic growth model is the Real Business Cycle (RBC) Model, which has become one of the standard macroeconomic models. It tries to explain macroeconomic fluctuations as equilibrium reactions of a representative agent economy with complete markets. Many refinements have been introduced since the seminal papers by Kydland and Prescott (1982) and Hansen (1985) improved the model’s fit with the data. Often the implications for asset prices are spelled out for RBC models. Asset prices contain valuable information about the intertemporal decision making of economic agents a mechanism is at the heart of the RBC methodology. Here, we summarize results from the work by Lettau, Gong and Semmler (2001) that uses a log-linear variant of the RBC model developed by Campbell (1994) and estimate the parameters of a standard RBC model by taking its asset pricing implications into account.