Working Paper: CEPR ID: DP3927
Authors: Joao F. Gomes; Amir Yaron; Lu Zhang
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. We also show that these results require a procyclical-financing premium, however, a property that seems at odds with the data
Keywords: Asset prices; Business cycles; Financial accelerator
JEL Codes: E22; E44; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| costly external finance (G32) | equity returns (G12) |
| financing frictions (G19) | stock return volatility (G17) |
| stock return volatility (G17) | equity premium (G12) |
| procyclical movements in the default premium (E32) | marginal costs associated with investment (G31) |
| marginal costs associated with investment (G31) | capital accumulation (E22) |
| capital accumulation (E22) | asset pricing (G19) |