Economic Activity of Firms and Asset Prices

Leonid Kogan and Dimitris Papanikolaou

Annual Review of Financial Economics, 2012, vol. 4, issue 1, 361-384

Abstract: In this review we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms' systematic risk and their investment and production decisions are jointly determined in equilibrium. Models with production provide insights into several types of empirical patterns, including (a) the correlations between firms' economic characteristics and their risk premia, (b) the comovement of stock returns among firms with similar characteristics, and (c) the joint dynamics of asset returns and macroeconomic quantities. Moreover, by explicitly relating firms' stock returns and cash flows to fundamental shocks, models with production connect the analysis of financial markets with the research on the origins of macroeconomic fluctuations.

Keywords: general equilibrium; asset pricing; investment; firm characteristics; stock returns (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (26)

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