Asset prices in a production economy

This paper develops an intertemporal general equilibrium theory of capital asset pricing. It is an attempt to put together ideas from the modern finance literature and the literature on stochastic growth models. In this way we will obtain a theory that ultimately is capable of addressing itself to general equilibrium questions such as: (1) What is the impact of an increase in the corporate income tax upon the relative prices of risky stocks? (2) What is the impact of an increase in progressivity of the personal income tax upon the relative price structure of risky assets? (3) What conditions on tastes and technology are needed for the validity of the Sharpe-Lintner certainty equivalence formula and the Ross (1976) arbitrage theory and so forth