The determination of the asset prices with an investment-specific technology model: implication for equity premium puzzle

Abstract

In this paper, by incorporating the investment-specific technology, capacity utilization and capital adjustment costs in a dynamic asset pricing model, we de rive closed-form analytical solutions for a variety of prices for financial assets. Our model has provided better understanding of the de termination of risk premia in models with production. Moreover, we have demonstrated that risk premia of long-term real bonds and equity are positive and the wedge between the equity premium and the long-term bond premium is relatively larger.