Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital

Ai, Hengjie; Croce, Mariano (Max) Massimiliano; Li, Kai

doi:10.2139/ssrn.1571330

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Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital

Review of Financial Studies 26 (2): 491-530, 2013, DOI: doi.org/10.1093/rfs/hhs121

61 Pages Posted: 15 Mar 2010 Last revised: 10 Mar 2017

See all articles by Hengjie Ai

Hengjie Ai

University of Minnesota - Carlson School of Management; affiliation not provided to SSRN

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Kai Li

Peking University HSBC Business School

Date Written: June 10, 2012

Abstract

We model investment options as intangible capital in a production economy in which younger vintages of assets in place have lower exposure to aggregate productivity risk. In equilibrium, physical capital requires a substantially higher expected return than intangible capital. Quantitatively, our model rationalizes a significant share of the observed difference in the average return of book-to-market-sorted portfolios (value premium). Our economy also produces (1) a high premium of the aggregate stock market over the risk-free interest rate, (2) a low and smooth risk-free interest rate, and (3) key features of the consumption and investment dynamics in the US data.

Keywords: Asset Pricing, General Equilibrium, Intangible Capital, Value Premium

JEL Classification: E13, E32, G12

Suggested Citation: Suggested Citation

Ai, Hengjie and Croce, Mariano Massimiliano and Li, Kai, Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital (June 10, 2012). Review of Financial Studies 26 (2): 491-530, 2013, DOI: doi.org/10.1093/rfs/hhs121 , Available at SSRN: https://ssrn.com/abstract=1571330 or http://dx.doi.org/10.2139/ssrn.1571330