Asset Prices and Business Cycles with Liquidity Shocks

Mahdi Nezafat and Ctirad Slavik

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: We develop a production based asset pricing model with financially constrained firms to explain the observed high equity premium and low risk-free rate volatility. Investment opportunities are scarce and firms face productivity and liquidity shocks. A negative liquidity shock forces firms to liquidate a fraction of their assets. We calibrate the model to U.S. data and find that it generates an equity premium and a level and volatility of risk-free rate comparable to those observed in the data. The model also fits key aspects of the behavior of aggregate quantities, in particular, the volatility of aggregate consumption and investment.

Keywords: general equilibrium; business cycles; production based asset pricing; equity premium and risk-free rate puzzles (search for similar items in EconPapers)
JEL-codes: E20 E32 G12 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-bec, nep-dge, nep-fdg, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.cerge-ei.cz/pdf/wp/Wp711.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cer:papers:wp711

Access Statistics for this paper

More papers in CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague Contact information at EDIRC.
Bibliographic data for series maintained by Lucie Vasiljevova ().