PUTTY-CLAY TECHNOLOGY AND STOCK MARKET VOLATILITY

Francois Gourio ()
Authors registered in the RePEc Author Service: Francisco Gomes (), Luis M. Viceira () and Laurence Kotlikoff ()

No WP2007-005, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: I derive a production-based asset pricing formula to infer aggregate stock market returns from macroeconomic time series when the technology is putty-clay. Capital heterogeneity leads to variation in the aggregate stock market value through a new compositional effect. The asset pricing formula, which holds regardless of the stochastic discount factor, predicts that stock returns are high when the ratio of investment to gross job creation is low. This contrasts with the adjustment cost model which predicts that stock returns are high when the investment-capital ratio is high. Incorporating the putty-clay technology increases substantially the ability of the adjustment cost model to match the data on U.S. stock returns.

New Economics Papers: this item is included in nep-dge, nep-pbe and nep-pub
Date: Written
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