Bond and Stock Returns in a Simple Exchange Model

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Bond and Stock Returns in a Simple Exchange Model

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Title: Bond and Stock Returns in a Simple Exchange Model
Author: Campbell, John
Citation: Campbell, John Y. 1986. Bond and stock returns in a simple exchange model. Quarterly Journal of Economics 101(4): 785-803.
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Abstract: This paper studies asset pricing in a general equilibrium representative agent exchange model. The assumptions of isoelastic period utility and lognormal endowment allow the derivation of closed-form solutions for asset returns without restricting the serial correlation of the log endowment. Risk premiums on stocks and real bonds are found to be simple functions of relative risk aversion, the variance of the log endowment innovation, and the weights in the moving average representation of the log endowment. The paper analyzes the sign of term premiums, the size of the equity premium, and the effect of taste shocks on asset prices.
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