Carlstrom and Fuerst meets Epstein and Zin: The Asset Pricing Implications of Contracting Frictions

Ram Yamarthy, Amir Yaron and João Gomes ()
Additional contact information
Ram Yamarthy: University of Pennsylvania
Amir Yaron: University of Pennsylvania

No 1267, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: Models with financial frictions have been shown to create amplification and persistence effects in macroeconomic fluctuations. We test the ability that Costly State Verification (CSV) has to generate empirically plausible risk exposures in asset markets, when Epstein and Zin (1989) preferences are implemented. Under the setup of Carlstrom and Fuerst (1997) alongside recursive preferences, we find that the CSV friction is negligible in augmenting the aggregate equity premium, explaining roughly thirty basis points when monitoring costs are increased. Additionally we find that the separation between the elasticity of intertemporal substitution and risk aversion plays a key role in explaining financial market dynamics. We are only able to generate sizable equity premium when the elasticity is greater than one.

Date: 2015
New Economics Papers: this item is included in nep-dge and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2015/paper_1267.pdf (application/pdf)

Related works:
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:red:sed015:1267

Access Statistics for this paper

More papers in 2015 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().