Cookies?
Library Header Image
LSE Research Online LSE Library Services

The equity risk premium and the riskfree rate in an economy with borrowing constraints

Kogan, Leonid, Makarov, Igor and Uppal, Raman (2007) The equity risk premium and the riskfree rate in an economy with borrowing constraints. Mathematics and Financial Economics, 1 (1). pp. 1-19. ISSN 1862-9679

Full text not available from this repository.
Identification Number: 10.1007/s11579-007-0001-3

Abstract

Our objective is to study analytically the effect of borrowing constraints on asset returns. We explicitly characterize the equilibrium for an exchange economy with two agents who differ in their risk aversion and are prohibited from borrowing. In a representative-agent economy with CRRA preferences, the Sharpe ratio of equity returns and the riskfree rate are linked by the risk aversion parameter. We show that allowing for preference heterogeneity and imposing borrowing constraints breaks this link. We find that an economy with borrowing constraints exhibits simultaneously a relatively high Sharpe ratio of stock returns and a relatively low riskfree interest rate, compared to both representative-agent and unconstrained heterogeneous-agent economies.

Item Type: Article
Official URL: http://www.springer.com/mathematics/quantitative+f...
Additional Information: © 2007 Springer
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 19 Aug 2013 07:50
Last Modified: 20 May 2019 00:54
URI: http://eprints.lse.ac.uk/id/eprint/51756

Actions (login required)

View Item View Item