NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Quantitative Asset Pricing Implications of Endogenous Solvency Constraints

Fernando Alvarez, Urban J. Jermann

NBER Working Paper No. 6953
Issued in February 1999
NBER Program(s):   AP

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 uncertainty that produce equity and term premia.

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Document Object Identifier (DOI): 10.3386/w6953

Published: Alvarez, F. and U. J. Jermann. "Quantitative Asset Pricing Implications Of Endogenous Solvency Constructs," Review of Financial Studies, 2001, v14(4,Oct), 1117-1151. citation courtesy of

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