TY  - JOUR
AU  - Alvarez,Fernando
AU  - Jermann,Urban J.
TI  - Quantitative Asset Pricing Implications of Endogenous Solvency Constraints
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6953
PY  - 1999
Y2  - February 1999
UR  - http://www.nber.org/papers/w6953
L1  - http://www.nber.org/papers/w6953.pdf
N1  - Author contact info:
Fernando E. Alvarez
University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL 60637
Tel: 773/702-4412
Fax: 773/702-8490
E-Mail: f-alvarez1@uchicago.edu

Urban Jermann
Finance Department
Wharton School of the University of Pennsylvania
3620 Locust Walk
Philadelphia, PA  19104
Tel: 215/898-4184
Fax: 215/898-6200
E-Mail: jermann@wharton.upenn.edu
AB  - 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.
ER  -