Two Trees
Review of Financial Studies
2008
We solve a model with two i.i.d. Lucas trees. Although the corresponding one-tree model produces a constant price-dividend ratio and i.i.d. returns, the two-tree model produces interesting asset-pricing dynamics. Investors want to rebalance their portfolios after any change in value. Because the size of the trees is fixed, prices must adjust to offset this desire. As a result, expected returns, excess returns, and return volatility all vary through time. Returns display serial correlation and are predictable from price-dividend ratios. Return volatility differs from cash-flow volatility, and return shocks can occur without news about cash flows.
- DOI
- 10.1093/rfs/hhm059
- Volume
- 21 (1)
- Pages
- 347-385
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref