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Asset Prices and Business Cycles with Costly External Finance

  • Joao Gomes
  • Amir Yaron
  • Lu Zhang

This paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.

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File URL: http://www.nber.org/papers/w9364.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9364.

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Date of creation: Dec 2002
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Publication status: published as Gomes, Joao F., Amir Yaron and Lu Zhang. "Asset Prices And Business Cycles With Costly External Finance," Review of Economic Dynamics, 2003, v6(3,Oct), 767-788.
Handle: RePEc:nbr:nberwo:9364
Note: AP EFG
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  17. Steven N. Kaplan & Luigi Zingales, 1995. "Do Financing Constraints Explain Why Investment is Correlated with Cash Flow?," NBER Working Papers 5267, National Bureau of Economic Research, Inc.
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  19. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
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