Micro frictions, asset pricing, and aggregate implications

Jack Favilukis and Xiaoji Lin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We use asset pricing insights to study importance of micro-level frictions for aggregate quantities. In our model, the relevant stochastic variable is a stationary growth rate (necessary to produce high Sharpe Ratios in a Long Run Risk world), as opposed to a trend-stationary level of productivity. This naturally implies a heteroscedastic and time-dependent aggregate investment rate; contributing to the recent debate between Khan and Thomas (2008) and Bachmann, Caballero, and Engel (2010), we find that non-convex costs are not necessary to match these moments. Our best model, combining convex and non-convex costs, matches aggregate macro-economic and micro-level investment moments, as well as the high Sharpe Ratio of equity.

JEL-codes: E23 E44 G12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-02-01
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http://eprints.lse.ac.uk/119075/ Open access version. (application/pdf)

Related works:
Working Paper: Micro Frictions, Asset Pricing, and Aggregate Implications (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119075

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