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In studying the consumption based dynamic asset pricing theory we have first presumed that there is an exogenously given dividend stream which is equal to the consumption stream of the agent whose utility function could take on different forms. For the case of simple utility functions we have also derived the Euler equation as the essential equation to study dynamic asset pricing. Appendix 2 derives the Euler equation from dynamic programming. As we also have shown, using preferences such as log or power utility, the equity premium and the Sharpe ratio cannot match the equity premium and the Sharpe ratio of actual time series data. For those preferences a too high parameter of risk aversion and/or a strong covariance of consumption growth with asset returns are required which one does not find in the data. The question thus remains whether models that more explicitly take into account production activities or rely on other types of preferences may be able to provide a better match of theory and the data. Asset pricing for production economies is taken up next. Other preferences are considered in Chap. 15.

In studying the consumption based dynamic asset pricing theory we have first presumed that there is an exogenously given dividend stream which is equal to the consumption stream of the agent whose utility function could take on different forms. For the case of simple utility functions we have also derived the Euler equation as the essential equation to study dynamic asset pricing. Appendix 2 derives the Euler equation from dynamic programming. As we also have shown, using preferences such as log or power utility, the equity premium and the Sharpe ratio cannot match the equity premium and the Sharpe ratio of actual time series data. For those preferences a too high parameter of risk aversion and/or a strong covariance of consumption growth with asset returns are required which one does not find in the data. The question thus remains whether models that more explicitly take into account production activities or rely on other types of preferences may be able to provide a better match of theory and the data. Asset pricing for production economies is taken up next. Other preferences are considered in Chap. 15.

This chapter studied stylized facts and the basic mechanisms of exchange-rate caused financial and real crises. As we have shown it is likely to be the connection of weak balance sheets (of households, firms, financial intermediaries, governments and countries) and large exchange rate shocks that lead to positive feedback mechanisms and thus to credit contraction, declining asset prices and economic activity, real crisis and large output loss. This in particular appears to be a basic mechanism if there exists in the country large debt denominated in foreign currency. Moreover, as we have shown, credit rationing and state dependent default premia may entail destabilizing mechanisms, possibly leading to low level equilibria. The insight of how financial and real risk can be enlarged by large currency shocks and to what extent an international portfolio might be able to hedge this risk is studied further in Chap. 13.

This chapter has employed perfect and imperfect capital market theory and discussed the relation of creditmarket borrowing, credit risk, asset prices and economic activity. We also have shown how in a simple model of the firm the micro-macro link may work. In the next chapter we want to pursue the question of how to empirically test for credit risk of economic agents and its impact on economic activity.

We have introduced and discussed two prototype models that go beyond consumption based approaches. Consumption is present in both agent based and evolutionary modeling of asset markets. Yet, at the forefront of those studies are the dynamics of asset returns and volatility. An interesting feature of evolutionary models is the idea of the replicator dynamics, borrowed from mathematical biology and evolutionary game theory according to which both the issue of asset market dynamics as well as wealth distribution in the long run can be addressed. Chap. 15 will consider those issues from the perspective of intertemporal dynamic asset pricing theory, including dynamic consumption decisions, but going beyond the consumption based asset pricing model.

The recently developed asset pricing models with habit formation and loss aversion seem to go a long way to explain the risk-free interest rate, equity premium and Sharpe ratio in amore plausible way than the earlier consumption based asset pricing models. In particular, the asset pricing model with loss aversion has great potentials not only to match the dynamics of equity prices but other markets with volatile price movements and risky returns as well. This new approach moves beyond the consumption based asset pricing model and allows to de-link consumption and asset returns. It also nicely explains the time varying risk aversion by referring to the actual gains and losses of financial wealth. This view of gains and losses giving rise to a time varying risk aversion, is not only relevant for the individual investor but in particular seems to be very important for institutional investors such as pension funds (that had guaranteed a certain return), universities (that have large operating costs) and foundations (that grant fellowships). For those institutions painful adjustment processes have to be enacted, once losses have occurred and thus a time varying risk aversion can easily predicted.

A rigorous asymptotic analysis concerning the phenomenon of non-uniqueness of quasi-equilibrium turbulent boundary layers in the large Reynolds number limit has recently been carried out in [2]. The approach contains the classical asymptotic theory of wall-bounded turbulent shear flows, cf. [3], as a limiting case. Compared to the latter, the novel theory allows for a moderately large but still asymptotically small velocity defect with respect to the external inviscid flow. Therefore, it applies to attached flow only which, however, exhibits some properties known from separating turbulent boundary layers. Here a first comparison of the theoretical results with numerical and experimental data is presented. As a special aspect, the impact of the equilibrium conditions on the associated external potential flow field is elucidated.

In studying the consumption based dynamic asset pricing theory we have first presumed that there is an exogenously given dividend stream which is equal to the consumption stream of the agent whose utility function could take on different forms. For the case of simple utility functions we have also derived the Euler equation as the essential equation to study dynamic asset pricing. Appendix 2 derives the Euler equation from dynamic programming. As we also have shown, using preferences such as log or power utility, the equity premium and the Sharpe ratio cannot match the equity premium and the Sharpe ratio of actual time series data. For those preferences a too high parameter of risk aversion and/or a strong covariance of consumption growth with asset returns are required which one does not find in the data. The question thus remains whether models that more explicitly take into account production activities or rely on other types of preferences may be able to provide a better match of theory and the data. Asset pricing for production economies is taken up next. Other preferences are considered in Chap. 15.