Asset Prices and Business Cycles with Costly External Finance

João Gomes (), Amir Yaron and Lu Zhang ()

No 9364, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.

Date: 2002-12
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Published as Gomes, Joao F., Amir Yaron and Lu Zhang. "Asset Prices And Business Cycles With Costly External Finance," Review of Economic Dynamics, 2003, v6(3,Oct), 767-788.

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Journal Article: Asset Prices and Business Cycles with Costly External Finance (2003)
Working Paper: Asset Prices and Business Cycles with Costly External Finance (2003)
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