Abstract

http://ssrn.com/abstract=1786838
 
 

References (47)



 
 

Citations (3)



 


 



Wage Rigidity: A Solution to Several Asset Pricing Puzzles


Jack Favilukis


London School of Economics & Political Science (LSE)

Xiaoji Lin


Ohio State University (OSU) - Fisher College of Business

March 30, 2012


Abstract:     
In standard models wages are too volatile and returns too smooth. We make wages sticky through infrequent resetting, resulting in both (i) smoother wages and (ii) volatile returns. Furthermore, the model produces other puzzling features of financial data: (iii) high Sharpe Ratios, (iv) low and smooth interest rates, (v) time-varying equity volatility and premium, and (vi) a value premium. In standard models, highly pro-cyclical and volatile wages are a hedge. The residual profit becomes unrealistically smooth, as do returns. Smoother wages act like operating leverage, making profits more risky. Bad times and unproductive firms are especially risky because committed wage payments are high relative to output.

Number of Pages in PDF File: 47

Keywords: Equity Volatility, Equity Premium, Return Predictability, Wage Rigidity, Long Run Risk, General Equilibrium

JEL Classification: E22, E23, E24, E32, G12

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Date posted: March 17, 2011 ; Last revised: September 16, 2012

Suggested Citation

Favilukis, Jack and Lin, Xiaoji, Wage Rigidity: A Solution to Several Asset Pricing Puzzles (March 30, 2012). Available at SSRN: http://ssrn.com/abstract=1786838 or http://dx.doi.org/10.2139/ssrn.1786838

Contact Information

Jack Favilukis (Contact Author)
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Xiaoji Lin
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
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