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Investment-specific shocks, business cycles, and asset prices

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  • Curatola, Giuliano
  • Donadelli, Michael
  • Grüning, Patrick
  • Meinerding, Christoph

Abstract

We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.

Suggested Citation

  • Curatola, Giuliano & Donadelli, Michael & Grüning, Patrick & Meinerding, Christoph, 2016. "Investment-specific shocks, business cycles, and asset prices," SAFE Working Paper Series 129, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:129
    DOI: 10.2139/ssrn.2747383
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    More about this item

    Keywords

    general equilibrium asset pricing; production economy; long-run risk; investment-specific shocks; nominal rigidities;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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