Consumption asset pricing with stable shocks - exploring a solution and its implications for mean equity returns

We study the consumption based asset pricing model due to Lucas (Econometrica 46 (1978) 1429). The exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework. The Gaussian process emerges as a special case. We derive exact analytical solutions for asset prices and returns, and provide conditions under which these exist. We also study the ability of the model to generate realistic values of observed mean rates of return. (C) 2002 Elsevier Science B.V. All rights reserved.