Asset Pricing with Capital Accumulation

A model is constructed for examining discrete time models of asset pricing. The model is a modification of Samuelson's (1958) overlapping generations model populated by 2 period-lived agents. This permits heterogeneous participation in the asset market. In any period, one group of agents will be net purchasers and one group net sellers. All 2nd-period individuals will supply all securities inelastically. Asset prices are, therefore, determined by the marginal substitution of young agents at any given date. The model allows the production of new capital, and investment is considered irreversible. This permits both the consideration of the fluctuations in the market price of capital relative to its replacement cost and the aggregation of investment. The results show there is no obvious correlation between the price of capital and its rental yields. Rapid decreases in capital stock are impeded, and an upper bound on the price of capital is imposed by technological rigidity in the environment.