Asset_PS - 3. Use contingent claims prices to verify that...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Problem Set 7: Asset Pricing Econ720. Fall 2009. Prof. Lutz Hendricks 1 Lucas trees 1 endowed with one tree. Each tree produces a stream of dividends, d t ; where d 0 = 1 and d t +1 d t can take on one of two values, + ± or ± , where 1 : The dividend growth rate is an i.i.d. random variable where the probability associated with each state is 0.5. Each household has preferences given by E P 1 t =0 ² t ln c t and c is consumption and ² is the discount factor. 1. De±ne a recursive competitive equilibrium for this economy. Include markets for trees as well as contingent claims. 2. Compute the equilibrium prices for trees and contingent claims.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3. Use contingent claims prices to verify that your derivation for the price of trees is correct. 4. Using the contingent claim prices, obtain the price of a riskless bond an asset that yields one unit of consumption the following period come what may. 5. Compute the average rate of return on bonds and trees. For riskless bonds, the return obviously is R whereas on equities (share of trees) the average return is the expected return E ( R e t ) = E t n p t +1 + d t +1 p t o . What is the equity premium ( E ( R e t ) & R t ) for this economy? 1 Due to Rajesh Singh. 1...
View Full Document

This note was uploaded on 10/29/2009 for the course ECON 720 at UNC.

Ask a homework question - tutors are online