Working Paper: NBER ID: w9364
Authors: Joao 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. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financing frictions (G19) | equity premium (G12) |
| financing frictions (G19) | consumption dynamics (E21) |
| financing frictions (G19) | stochastic discount factor (D15) |
| financing frictions (G19) | stock return volatility (G17) |
| price of capital (G31) | stock return volatility (G17) |
| marginal costs of investment (G31) | price of capital (G31) |
| financing frictions (G19) | stock returns (G12) |