Micro frictions, asset pricing, and aggregate implications

Favilukis, Jack and Lin, Xiaoji (2011) Micro frictions, asset pricing, and aggregate implications. Financial Markets Group Discussion Papers (673). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We use asset pricing insights to study importance of micro-level frictions for aggregate quantities. In our model, the relevant stochastic variable is a stationary growth rate (necessary to produce high Sharpe Ratios in a Long Run Risk world), as opposed to a trend-stationary level of productivity. This naturally implies a heteroscedastic and time-dependent aggregate investment rate; contributing to the recent debate between Khan and Thomas (2008) and Bachmann, Caballero, and Engel (2010), we find that non-convex costs are not necessary to match these moments. Our best model, combining convex and non-convex costs, matches aggregate macro-economic and micro-level investment moments, as well as the high Sharpe Ratio of equity.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2011 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E23 - Production E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	29 Jun 2023 15:00
Last Modified:	14 Sep 2024 04:31
URI:	http://eprints.lse.ac.uk/id/eprint/119075

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