Can Financing Constraints Explain the Asset Pricing Puzzles in Production Economies?
نویسنده
چکیده
General Equilibrium asset pricing models have a difficult time simultaneously delivering a sizable equity premium, a low and counter-cyclical real risk free rate, as well as cyclical variation in return volatility. To explain these stylized facts, this paper introduces occasionally binding financing constraints that impede producers’ ability to invest in an otherwise standard real business cycle model. These financing constraints increase the marginal cost of investing without altering the marginal rate of substitution directly, generating a sizable equity premium as well as other standard business cycle quantity and price moments. The financial frictions drive a wedge between the marginal rate of substitution and firms’ internal stochastic discount factors so that the shadow value of capital is no longer tied to the average price of capital serving to increase asset price volatility. JEL Codes: G12;E22;C63
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