IH1_Asset_SL

# IH1_Asset_SL - Pricing Assets Prof Lutz Hendricks August 6...

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Pricing Assets Prof. Lutz Hendricks August 6, 2009 L. Hendricks () Pricing Assets August 6, 2009 1 / 19

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Pricing Assets: An Example The in&nite horizon model can be used to price long-lived assets. This is more interesting in stochastic economies. It then yields the famous β measure of risk and the CAPM. L. Hendricks () Pricing Assets August 6, 2009 2 / 19
Pricing Assets: An Example We study an example with these features: A representative household with utility t = 0 β t u ( c t ) . The household supplies N units of labor to the &rm. Firms produce a perishable good using labor and land. Land is in &xed supply L . L. Hendricks () Pricing Assets August 6, 2009 3 / 19

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Firms Firms rent labor and land to produce a single, perishable good. The production function is F ( N t , L t ; A t ) . constant returns in ( N , L ) The productivity sequence f A t g is given. L. Hendricks () Pricing Assets August 6, 2009 4 / 19
Firm&s problem The ±rm&s problem is standard: max F ( N t , L t ; A t ) & w t N t & r t L t (1) FOCs: r = F L (2) w = F N (3) Solution: N t , L t that satisfy the 2 FOCs. L. Hendricks () Pricing Assets August 6, 2009 5 / 19

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Household The household solves V ( l ) = max u ( c ) + β V ( l 0 ) (4) subject to p ( l 0 & l ) = w N + r l & c The &rst-order conditions are p u 0 ( c ) = β V 0 ( l 0 ) V 0 ( l ) = u 0 ( c ) ( r + p ) L. Hendricks () Pricing Assets August 6, 2009 6 / 19
Household The Euler equation is standard u 0 ( c ) = β u 0 ( c 0 ) r 0 + p 0 p Solution: f c t , l t g that solve the Euler equation and budget constraint.

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

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IH1_Asset_SL - Pricing Assets Prof Lutz Hendricks August 6...

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