SOLVING ASSET PRICING-MODELS WITH GAUSSIAN SHOCKS

This paper provides a closed-form solution for the price-dividend rati o in a standard asset pricing model when the growth rate of the endowm ent is a first-order Gaussian autoregression. It determines the condit ions under which this solution is bounded. The findings are useful in allowing comparisons among numerical methods used to approximate the n ontrivial closed-form. The solution method is extended to accommodate multivariate and higher-ordered autoregressive processes. (C) 1998 Els evier Science B.V. All rights reserved.