Equilibrium correlations of asset price and return

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Detail(s)

Original languageEnglish
Pages (from-to)233-256
Journal / PublicationJournal of Real Estate Finance and Economics
Volume34
Issue number2
Publication statusPublished - Feb 2007

Abstract

Two empirical questions concerning the equity and housing have been studied extensively: (1) Are the price and return serially correlated, and (2) What is the optimal weight of housing in the portfolio? The answer to the second question crucially depends on the cross-correlation of assets. This paper complements the literature by building a simple dynamic general equilibrium with fully rational agents, and obtain closed form solutions for the implied auto- and cross-correlations. The length of time horizon, as well as the persistence of economic shock matter. Implications and future research directions are then discussed. © Springer Science+Business Media, LLC 2007.

Research Area(s)

  • Market efficiency, Predictability, Price and return, Rational expectation, Serial and cross correlation