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Micro Frictions, Asset Pricing and Aggregate

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  • Jack Favilukis

    ()

  • Xiaoji Lin

    ()

Abstract

We use asset pricing insights to study importance of micro-level frictions for aggregate quantities. In our model, the relevant stochastic variable is a stationary growth rate (necessary to produce high Sharpe Ratios in a Long Run Risk world), as opposed to a trend-stationary level of productivity. This naturally implies a heteroscedastic and timedependent aggregate investment rate; contributing to the recent debate between Khan and Thomas (2008) and Bachmann, Caballero, and Engel (2010), we find that non-convex costs are not necessary to match these moments. Our best model, combining convex and nonconvex costs, matches aggregate macro-economic and micro-level investment moments, as well as the High Sharpe Ratio of equity.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP673_2011_MicroFrictions.pdf
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Bibliographic Info

Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp673.

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Date of creation: Feb 2011
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Handle: RePEc:fmg:fmgdps:dp673

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Web page: http://www.lse.ac.uk/fmg/

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  3. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
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  18. Ruediger Bachmann & Ricardo J. Caballero & Eduardo Engel, 2006. "Lumpy Investment in Dynamic General Equilibrium," Cowles Foundation Discussion Papers 1566, Cowles Foundation for Research in Economics, Yale University.
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