"Stock Price Volatility, Negative Auto-correlation and consumption-wealth ratio: the case of constant fundamentals", Pacific Economic Review, (SSCI)

Based on infinite-horizon models, previous theoretical works show that the empirical stock price movement is not justified by the changes in dividends. This paper provides a simple overlapping generations model with constant fundamentals in which the stock price displays volatility and negative auto-correlation even without changes in dividend. We find that the nature of the dynamics of asset prices depend crucially on certain combinations of preference parameters, such as the rate of time preference and the elasticity of intertemporal substitution. In addition, the welfare of different cohorts varies and depends on the price of the stock at the period they were born. An immediate implication is that, the equilibrium volatility of stock returns depends not only on the stochastic structure of the dividend, but also the planning horizon of the agents. Thus, the "excess volatility" of stock returns should be interpreted more cautiously.