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Economic Activity of Firms and Asset Prices

  • 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)

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.

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Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

Volume (Year): 4 (2012)
Issue (Month): 1 (October)
Pages: 361-384

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Handle: RePEc:anr:refeco:v:4:y:2012:p:361-384
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