Investment-Specific Shocks, Business Cycles, and Asset Prices

59 Pages Posted: 11 Jun 2015 Last revised: 20 Dec 2017

See all articles by Giuliano Curatola

Giuliano Curatola

University of Siena - Department of Economics and Statistics; Leibniz Institute for Financial Research SAFE

Michael Donadelli

University of Brescia

Patrick Grüning

Latvijas Banka

Christoph Meinerding

Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2017

Abstract

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

Curatola, Giuliano and Donadelli, Michael and Grüning, Patrick and Meinerding, Christoph, Investment-Specific Shocks, Business Cycles, and Asset Prices (December 19, 2017). Available at SSRN: https://ssrn.com/abstract=2617192 or http://dx.doi.org/10.2139/ssrn.2617192

Giuliano Curatola

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Michael Donadelli (Contact Author)

University of Brescia ( email )

Piazza del Mercato, 15
25122 Brescia
Italy

Patrick Grüning

Latvijas Banka ( email )

K. Valdemāra iela 2A
Riga, 1050
Latvia

Christoph Meinerding

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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