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Market-Based Solutions to Vital Economic Issues
Research
Feb 1, 2013

Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital

Abstract

We model investment options as intangible capital in a production economy in which younger vintages of assets in place have lower exposure to aggregate productivity risk. In equilibrium, physical capital requires a substantially higher expected return than intangible capital. Quantitatively, our model rationalizes a significant share of the observed difference in the average return of book-to-market-sorted portfolios (value premium). Our economy also produces (1) a high premium of the aggregate stock market over the risk-free interest rate, (2) a low and smooth risk-free interest rate, and (3) key features of the consumption and investment dynamics in the US data.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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