Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle

Francesco Bianchi, Cosmin Ilut and Martin Schneider

No 20081, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper 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 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.

JEL-codes: D8 E3 E4 G1 G3 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP CF EFG ME
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Citations: View citations in EconPapers (17)

Published as Francesco Bianchi & Cosmin L. Ilut & Martin Schneider, 2018. "Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle," The Review of Economic Studies, vol 85(2), pages 810-854.

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Related works:
Journal Article: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2018)
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 (2013)
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