Asset Prices and Business Cycles with Costly External Finance

João F. Gomes (), Amir Yaron () and Lu Zhang ()

No 3927, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. We also show that these results require a procyclical-financing premium, however, a property that seems at odds with the data.

Keywords: asset prices; business cycles; financial accelerator (search for similar items in EconPapers)
JEL-codes: E22 E44 G31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-dge and nep-mac
Date: 2003-06
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Working Paper: Asset Prices and Business Cycles with Costly External Finance (2002)
Journal Article: Asset Prices and Business Cycles with Costly External Finance (2003)
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