Exact Solutions for Expected Rates of Return Under Markov Regime Switching
Author | : Andrew B. Abel |
Publisher | : |
Total Pages | : 31 |
Release | : 2010 |
ISBN-10 | : OCLC:1290832086 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Exact Solutions for Expected Rates of Return Under Markov Regime Switching written by Andrew B. Abel and published by . This book was released on 2010 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper derives simple closed-form solutions for expected rates of return on stocks and riskless one-period bills under the assumption that shocks to the growth rates of consumption and dividends are generated by a Markov regime-switching process. These closed-form solutions are used to show that the Markov regime-switching process exacerbates the equity premium puzzle and the risk-free rate puzzle. Three empirical examples illustrate the magnitude of the effects of Markov regime switching on equilibrium expected returns.