Risk and return in a dynamic general equilibrium model

Date
2000
Authors
Akdeniz, L.
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Source Title
Journal of Economic Dynamics and Control
Print ISSN
0165-1889
Electronic ISSN
Publisher
Elsevier
Volume
24
Issue
5
Pages
1079 - 1096
Language
English
Type
Article
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Abstract

In this paper we examine the relationship between risk and return on productive assets using the intertemporal general equilibrium model of Brock (1982, Asset Prices in a Production Economy, the University of Chicago Press, Chicago, pp. 1-42) as a basis for a simulation study. Current computational techniques are used to solve the growth model of Brock (1979, An Integration of Stochastic Growth and the Theory of Finance - Part I: The Growth Model, Academic Press, New York, pp. 165-192) in order to analyze the underlying financial model. Contrary to recent empirical findings, we find that there is a theoretical basis for the linear relationship between risk and return. This apparent contradiction is due in part to the fact that the dynamic relationship between risk and return depends on the level of output.

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Keywords
Expected stock returns, Cross-section, Common-stocks, Market value, Earnings, Economy, Growth, Capm
Citation
Published Version (Please cite this version)