Asset Pricing at the Zero Lower Bound Public Deposited

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Last Modified
  • March 19, 2019
  • Howard, Philip
    • Affiliation: Kenan-Flagler Business School
  • In a New-Keynesian model subject to the zero lower bound (ZLB), constrained monetary policy endogenously results in time-varying equity risk premia and equity-bond market correlations. Liquidity traps at the ZLB are characterized by negatively skewed and increasingly uncertain consumption growth, labor growth, and inflation. Investors with recursive preferences price the liquidity traps, resulting in rising equity risk premiums. Real bond yields and equity returns become negatively correlated at the ZLB, while positive in normal times. The model provides a general equilibrium foundation for 1) the time-varying comovement amongst macroeconomic quantities and asset prices observed during the the Great Recession and 2) why real bonds ceased to provide investors with insurance at the ZLB, precisely when they valued it most.
Date of publication
Resource type
Rights statement
  • In Copyright
  • Connolly, Robert A.
  • Lundblad, Christian
  • Croce, Mariano
  • Colacito, Riccardo
  • Conrad, Jennifer
  • Chari, Anusha
  • Doctor of Philosophy
Degree granting institution
  • University of North Carolina at Chapel Hill Graduate School
Graduation year
  • 2016

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