Stock Price Volatility, Negative Autocorrelation and the Consumption–Wealth Ratio : The Case of Constand Fundamentals

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Original languageEnglish
Pages (from-to)224 - 245
Journal / PublicationPacific Economic Review
Issue number2
Publication statusPublished - 2010


Based on infinite horizon models, previous theoretical works show that the empiricalstock price movement is not justified by the changes in dividends. The present paper provides asimple overlapping generations model with constant fundamentals in which the stock price displaysvolatility and negative autocorrelation even without changes in dividend. The horizon of the agentsmatters. In addition, as in recent empirical works, the aggregate consumption–wealth ratio ‘predicts’the asset return. Thus, this framework may be useful in understanding different stylized facts in assetpricing. Directions for future research are also discussed.