Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle

Francesco Bianchi, Cosmin Ilut and Martin Schneider

The Review of Economic Studies, 2018, vol. 85, issue 2, 810-854

Abstract: This article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms’ shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for the postwar comovement in investment, stock prices, leverage, and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.

Keywords: Uncertainty; Ambiguity; Investment; Excess volatility; Capital structure; Regime switches (search for similar items in EconPapers)
JEL-codes: C11 D81 E22 E32 E44 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (38)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx035 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Uncertainty shocks, asset supply and pricing over the business cycle (2017)
Working Paper: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2014)
Working Paper: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:85:y:2018:i:2:p:810-854.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().