TY - JOUR

T1 - Equilibrium asset pricing with short rate risk

AU - Sbuelz, Alessandro

PY - 2024

Y1 - 2024

N2 - I study the exact percentage price reaction (in absolute value) to changes in the short rate for long-lived assets in a tractable long-run risk equilibrium model with fluctuating expected growth rates. Calibration reveals that, under time-additive expected utility, perpetuities with constant coupons exhibit a larger effective duration than the absolute value of the stock price logarithmic derivative due to a mild positive comovement between short rates and expected dividend growth. Conversely, under Epstein-Zin preferences with unit elasticity of intertemporal substitution, the perpetuity’s effective duration is smaller due to a pronounced positive comovement between short rates and expected dividend growth. My findings suggest that strong persistence in fundamentals contributes to non-linearities in the equilibrium log prices of long-lived assets. (JEL Classification Code: G12). Keywords: equilibrium short rate, long-run risk, effective duration, stock pricing, perpetuity/consol pricing.

AB - I study the exact percentage price reaction (in absolute value) to changes in the short rate for long-lived assets in a tractable long-run risk equilibrium model with fluctuating expected growth rates. Calibration reveals that, under time-additive expected utility, perpetuities with constant coupons exhibit a larger effective duration than the absolute value of the stock price logarithmic derivative due to a mild positive comovement between short rates and expected dividend growth. Conversely, under Epstein-Zin preferences with unit elasticity of intertemporal substitution, the perpetuity’s effective duration is smaller due to a pronounced positive comovement between short rates and expected dividend growth. My findings suggest that strong persistence in fundamentals contributes to non-linearities in the equilibrium log prices of long-lived assets. (JEL Classification Code: G12). Keywords: equilibrium short rate, long-run risk, effective duration, stock pricing, perpetuity/consol pricing.

KW - equilibrium short rate

KW - long-run risk

KW - perpetuity/consol pricing

KW - stock pricing

KW - effective duration

KW - equilibrium short rate

KW - long-run risk

KW - perpetuity/consol pricing

KW - stock pricing

KW - effective duration

UR - http://hdl.handle.net/10807/276977

UR - https://link.springer.com/article/10.1007/s10203-024-00442-4

U2 - 10.1007/s10203-024-00442-4

DO - 10.1007/s10203-024-00442-4

M3 - Article

SN - 1593-8883

SP - N/A-N/A

JO - Decisions in Economics and Finance

JF - Decisions in Economics and Finance

ER -