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Economic Activity of Firms and Asset Prices

Author

Listed:
  • Leonid Kogan

    () (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02138)

  • Dimitris Papanikolaou

    () (National Bureau of Economic Research, Cambridge, Massachusetts 02138
    Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

Abstract

In this review we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms' systematic risk and their investment and production decisions are jointly determined in equilibrium. Models with production provide insights into several types of empirical patterns, including (a) the correlations between firms' economic characteristics and their risk premia, (b) the comovement of stock returns among firms with similar characteristics, and (c) the joint dynamics of asset returns and macroeconomic quantities. Moreover, by explicitly relating firms' stock returns and cash flows to fundamental shocks, models with production connect the analysis of financial markets with the research on the origins of macroeconomic fluctuations.

Suggested Citation

  • Leonid Kogan & Dimitris Papanikolaou, 2012. "Economic Activity of Firms and Asset Prices," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 361-384, October.
  • Handle: RePEc:anr:refeco:v:4:y:2012:p:361-384
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101731
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    Citations

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    Cited by:

    1. Leonid Kogan & Dimitris Papanikolaou, 2012. "A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks," NBER Working Papers 17975, National Bureau of Economic Research, Inc.
    2. Frederico Belo & Xiaoji Lin & Jun Li & Xiaofei Zhao, 2015. "Labor-Force Heterogeneity and Asset Prices: the Importance of Skilled Labor," NBER Working Papers 21487, National Bureau of Economic Research, Inc.
    3. Andrew Y. Chen, 2013. "External Habit in a Production Economy," 2013 Papers pch1244, Job Market Papers.
    4. Chen, Andrew Y., 2014. "Precautionary Volatility and Asset Prices," Finance and Economics Discussion Series 2014-59, Board of Governors of the Federal Reserve System (U.S.).
    5. Kai Li & Fang Yang & Hengjie Ai, 2015. "Financial Intermediation and Capital Reallocation," 2015 Meeting Papers 429, Society for Economic Dynamics.
    6. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2013. "Winners and Losers: Creative Destruction and the Stock Market," NBER Working Papers 18671, National Bureau of Economic Research, Inc.
    7. Fuchs, William & Green, Brett & Papanikolaou, Dimitris, 2016. "Adverse selection, slow-moving capital, and misallocation," Journal of Financial Economics, Elsevier, vol. 120(2), pages 286-308.
    8. Mihaela-Cristina Onica & Jalba Silvia & Nedelcu Andreea - Izabela, 2015. "Comparative Analysis Regarding The Study Of The Financial Balance Of Companies Listed On The Stock Market," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 509-525.
    9. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    10. P. Lopez, 2014. "The Term Structure of the Welfare Cost of Uncertainty," Working papers 521, Banque de France.
    11. Cho, Sungjun, 2013. "New return anomalies and new-Keynesian ICAPM," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 87-106.
    12. Kim, Myeong Hyeon & Sun, Lingxia, 2017. "Dynamic conditional correlations between Chinese sector returns and the S&P 500 index: An interpretation based on investment shocks," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 309-325.

    More about this item

    Keywords

    general equilibrium; asset pricing; investment; firm characteristics; stock returns;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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