Investment-Specific Shocks, Business Cycles, and Asset Prices
59 Pages Posted: 11 Jun 2015 Last revised: 20 Dec 2017
Date Written: December 19, 2017
A previously disregarded source of time variation in real investment opportunities, namely long-run investment productivity shocks, helps explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable spread in expected returns and return volatilities between the investment and consumption sector. Moreover, long-run investment shocks command a positive risk premium. We filter long-run components from US sectoral TFP time series and find empirical evidence in favor of the key model mechanisms in both macroeconomic and asset pricing data.
Keywords: General Equilibrium Asset Pricing, Production Economy, Long-Run Risk, Investment-Specific Shocks
JEL Classification: E32, G12
Suggested Citation: Suggested Citation