Quantitative Asset Pricing Implications of Endogenous Solvency Constraints

@article{lvarez1999QuantitativeAP,
  title={Quantitative Asset Pricing Implications of Endogenous Solvency Constraints},
  author={Fernando {\'A}lvarez and Urban J. Jermann},
  journal={Capital Markets: Asset Pricing \& Valuation eJournal},
  year={1999}
}
We study the asset pricing implications of an economy where solvency constraints are determined to efficiently deter agents from defaulting. We present a simple example for which efficient allocations and all equilibrium elements are characterized analytically. The main model produces large equity premia and risk premia for long term bonds with low risk aversion and a plausibly calibrated income process. We characterize the deviations from independence of aggregate and individual income… Expand
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