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Solving Asset Pricing Models when the Price-Dividend Function Is Analytic
Abstract
We present a new method for solving asset pricing models, which yields an analytic price–dividend function of one state variable. To illustrate our method we give a detailed analysis of Abel's asset pricing model. A function is analytic in an open interval if it can be represented as a convergent power series near every point of that interval. In addition to allowing us to solve for the exact equilibrium price–dividend function, the analyticity property also lets us assess the accuracy of any numerical solution procedure used in the asset pricing literature.
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