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Nominal Rigidities and Asset Pricing

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  • Michael Weber

    (UC Berkeley)

Abstract

This paper examines the asset-pricing implications of nominal rigidities. I find that firms that adjust their product prices infrequently earn a cross-sectional return premium of more than 4% per year. Merging confidential product price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and is not driven by other firm and industry characteristics. The consumption-wealth ratio is a strong predictor of the return differential in the time series, and differential exposure to systematic risk fully explains the premium in the cross section. The sticky-price portfolio has a conditional market beta of 1.3, which is 0.4 higher than the beta of the flexible-price portfolio. The frequency of price adjustment is therefore a strong determinant of the cross section of stock returns. To rationalize these facts, I develop a multi-sector production-based asset-pricing model with sectors differing in their frequency of price adjustment.

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  • Michael Weber, 2014. "Nominal Rigidities and Asset Pricing," 2014 Meeting Papers 53, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:53
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    Cited by:

    1. Phuong Ngo & Francois Gourio, 2016. "Risk Premia at the ZLB: a macroeconomic interpretation," 2016 Meeting Papers 1585, Society for Economic Dynamics.
    2. Simon Gilchrist & Raphael Schoenle & Jae Sim & Egon Zakrajšek, 2017. "Inflation Dynamics during the Financial Crisis," American Economic Review, American Economic Association, vol. 107(3), pages 785-823, March.
    3. Pierlauro Lopez, 2018. "A New Keynesian Q Theory and the Link Between Inflation and the Stock Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 85-105, July.
    4. Simon Mongey, 2017. "Market Structure and Monetary Non-Neutrality," 2017 Meeting Papers 184, Society for Economic Dynamics.
    5. Pier dup Lopez & J. David López-Salido & Francisco Vazquez-Grande, 2015. "Nominal Rigidities and the Term Structures of Equity and Bond Returns," Finance and Economics Discussion Series 2015-64, Board of Governors of the Federal Reserve System (U.S.).
    6. Michael Weber & Daniel Hoang & Francesco D'Acunto, 2015. "Inflation Expectations and Consumption Expenditure," 2015 Meeting Papers 1266, Society for Economic Dynamics.

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