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Putty-clay technology and stock market volatility

  • Gourio, François

Firms' first-order conditions imply that stock returns equal investment returns from the production technology. Much applied work uses the adjustment cost technology, which implies that the realized return is high when the investment-capital ratio is high. This paper derives, for an arbitrary stochastic discount factor, the investment return implied by the putty-clay technology. The combination of capital heterogeneity and irreversibility creates a novel channel for return volatility. The investment return is high when the ratio of investment to gross job creation is low. Empirically, the putty-clay feature helps account for U.S. stock market data.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 2 (March)
Pages: 117-131

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Handle: RePEc:eee:moneco:v:58:y:2011:i:2:p:117-131
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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