Stock and Bond Pricing in an Affine Economy
Coauthor(s): Steven Grenadier.
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This article provides a stochastic valuation framework for bond and
stock returns that builds on three di¤erent pricing traditions: a¢ne models
of the term structure, present-value pricing of equities, and consumptionbased
asset pricing. Our model provides a more general application of the
a¢ne framework in that both bonds and equities are priced in a consistent
fashion. This pricing consistency implies that term structure variables help
price stocks while stock price fundamentals help price the term structure.
We illustrate our model by considering three examples that are similar in
spirit to well-known pricing models that fall within our general framework:
a Mehra and Prescott (1985) economy, a present value model similar to
Campbell and Shiller (1988), and a model with stochastic risk aversion
similar to Campbell and Cochrane (1999). The empirical performance of
our models is explored, with a particular emphasis on return predictability.
Source: Working paper
Bekaert, Geert, and Steven Grenadier. "Stock and Bond Pricing in an Affine Economy." Working paper, Columbia University and NBER, 2001.