Debt, equity and the Equity price puzzle

Daria Finocchiaro and Caterina Mendicino

No 314, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We show that in a model with equity and debt financing, the specfication of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact.

Keywords: liquidity shocks; collateral constraints; stock prices; comovement (search for similar items in EconPapers)
JEL-codes: E32 E44 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2015-12-01
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0314

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