Asset pricing with free entry and exit of firms

Lorant Kaszab, Aleš Maršál and Katrin Rabitsch

Economics Letters, 2022, vol. 217, issue C

Abstract: We study the asset-pricing implications of changes in the variety of consumption goods which happens through free entry and exit of firms. Fluctuations in varieties drive a wedge between the measured and model-based (including variety growth) consumer price index making the pricing kernel as well as asset prices more volatile without driving up the volatility of consumption growth. Different from earlier endowment economy models of variety growth our model contains production which (i) generates the correlations important for the explanation of the high mean and volatility of equity premium endogenously, and (ii) leads to an increase of about 140 basis points in the risk-premia relative to the endowment model.

Keywords: Firm entry–exit; Equity risk premium (search for similar items in EconPapers)
JEL-codes: E32 E60 G12 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Asset Pricing with Free Entry and Exit of Firms (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:217:y:2022:i:c:s0165176522002087

DOI: 10.1016/j.econlet.2022.110648

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