Solving asset pricing models with Gaussian shocks

Abstract

This paper provides a closed-form solution for the price-dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first-order Gaussian autoregression. It determines the conditions under which this solution is bounded. The findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed-form. The solution method is extended to accommodate multivariate and higher-ordered autoregressive processes.