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1、ASSETPRICINGANDTHECREDITMARKETFrancisA.LongstaffJiangWangUCLAAndersonSchoolMITSloanSchool,andNBERCCFR,andNBERAbstractWestudyassetpricingandtradingbehaviorinanexchangeeconomypopulatedbytwoagentswithdifferentriskaversion.Weshowthatthecreditmarketplaysacentralroleintherisksharingbetweenthetwoagents.It
2、allowstheless-risk-averseagenttoborrowinordertotakeonleveredpositionsinthestockandthusbearmorerisk.Optimalrisksharingresultsinthemore-risk-averseagenteffectivelysellingcovered“call”optionstotheless-risk-averseagent.Asthestateoftheeconomychanges,theequilibriumamountofcreditinthemarketalsofluctuates,
3、whichinturninfluencesexpectedstockreturns,stockreturnvolatility,thetermstructureofinterestrates,andtradingactivityinthestockmarket.Wefurtherexploretheimmediateempiricalimplicationthatvariationinthesizeofthecreditmarketisrelatedtovariationinexpectedstockreturns.Usingvariousmeasuresofchangesinthesiz
4、eofthecreditmarket,wefindthattheyhavesignificantpowerinforecastingone-yearexcessreturnsofthestockmarket.Ourresultssuggeststhatthecreditsectorisoffundamentalimportancetothebehaviorofassetprices.Firstdraft:November2007.Currentdraft:April2008.TheauthorsaregratefulforhelpfuldiscussionswithJohnCochrane,
5、JunLiu,HannoLustig,andPedroSanta-Clara,forexcellentresearchassistancefromDongyanYe,andforcommentsfromseminarparticipantsattheFDIC.1.INTRODUCTIONThesimplerepresentative-agentsettinghasbecomeoneofthemost-popularmodelsforstudyingequilibriumassetpricing(e.g.,Lucas(1978)andCox,IngersollandRoss(1985)).
6、Insuchasetting,thecreditmarketplaysonlyavirtualrole.Fortherepresentativeagent,equilibriumborrowingandlending,whichequalstheaggregatesupplyofcredit,isalwayszero.Hence,modelswithonlyonerepresentativeagentarelargelysilentaboutquantityvariablesinthemarketandtheirconnectionwithprices.Inparticular,they
7、makenopredictionsabouttheactualbehaviorofthecreditsectorandhowitinfluencesassetpricing.Inreality,however,thecreditsectorplaysacentralroleinthefinancialmarkets.Recenteventssuchasthesubprime-mortgagecrisisandthesubsequentl
