Working Paper: NBER ID: w2780
Authors: Robert Flood
Abstract: Observers have often characterized asset markets as being subject to periods of tranquility and periods of turbulence. Until recently, however, researchers were unable to produce closed-form asset pricing formulas in a model environment of time-varying risk. Some work by Abel provided us with the insights needed to produce such formulas. This paper gives an exposition of how to develop the formulas in an, environment where the formulas may be obtained using a simple extension of standard tools. While the paper is intended mainly as an exposition of new work, it also contains a report on the asset market effect of fiscal reform. IC is found that entering a period of week coordination between government spending end taxing (tax rate) policy is good for stock prices.
Keywords: Asset Pricing; Time-Varying Risk; Fiscal Policy
JEL Codes: E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weak coordination between government spending and tax policy (H19) | increase in stock prices (G10) |
| Changes in fiscal policy (E62) | changes in agents' perceptions of risk (D80) |
| Changes in agents' perceptions of risk (D81) | effect on asset valuation (G19) |
| Fiscal feedback from output levels (E62) | asset prices (G19) |