Investment-specific shocks, business cycles, and asset prices

Giuliano Curatola, Michael Donadelli, Patrick Grüning and Christoph Meinerding

No 129, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.

Keywords: general equilibrium asset pricing; production economy; long-run risk; investment-specific shocks; nominal rigidities (search for similar items in EconPapers)
JEL-codes: E32 G12 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Working Paper: Investment-Specific Shocks, Business Cycles, and Asset Prices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:129

DOI: 10.2139/ssrn.2747383

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