Asset Pricing with Idiosyncratic Shocks

Pithak Srisuksai () and Vimut Vanitcharearntham ()
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Pithak Srisuksai: School of Economics, Sukhothai Thammathirat Open University, 9/9 Moo 9, Bangpood Subdistrict, Pakkret District, Nonthaburi 11120 Thailand.
Vimut Vanitcharearntham: Faculty of Commerce and Accountancy, Chulalongkorn University, Phyathai Road, Pathumwan, Bangkok 10330, Thailand.

Applied Economics Journal, 2016, vol. 23, issue 1, 35-58

Abstract: This study shows the relationship between idiosyncratic shocks and expected returns on stock regarding theoretical and empirical results. The dynamic stochastic general equilibrium is derived from idiosyncratic stochastic productivity level in production function of heterogenous firms to come up with a new asset pricing model. Given any state S, the main finding states that expected stock returns depends on the rate of time preference, depreciation rate, capital share, expected idiosyncratic productivity level at time t + 1,\ the percentage deviation of capital from steady state at time t + 1, and the percentage deviation of labor from steady state at time t + 1, In fact, expected idiosyncratic productivity level, expected capital, and expected labor are the determinant factors that affect on expected stock returns. Eventually, expected idiosyncratic stochastic productivity level is positively related to expected stock returns similar to expected labor. In contrast, expected capital has a negative effect on expected stock returns.

Keywords: Idiosyncratic productivity shock; Asset pricing; Dynamic general equilibrium model (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:aej:apecjn:v:23:y:2016:i:1:p:35-58

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