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Putty-Clay Technology And Stock Market Volatility

  • Francois Gourio

    ()

    (Boston University, Department of Economics)

I derive a production-based asset pricing formula to infer aggregate stock market returns from macroeconomic time series when the technology is putty-clay. Capital heterogeneity leads to variation in the aggregate stock market value through a new compositional effect. The asset pricing formula, which holds regardless of the stochastic discount factor, predicts that stock returns are high when the ratio of investment to gross job creation is low. This contrasts with the adjustment cost model which predicts that stock returns are high when the investment-capital ratio is high. Incorporating the putty-clay technology increases substantially the ability of the adjustment cost model to match the data on U.S. stock returns.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2007-005.

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Length: 31 pages
Date of creation: Jan 2007
Handle: RePEc:bos:wpaper:wp2007-005
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