Asset Prices and Business Cycles with Financial Shocks

61 Pages Posted: 22 Mar 2010 Last revised: 25 May 2015

See all articles by Pedram Nezafat

Pedram Nezafat

University of Michigan at Ann Arbor - Finance

Ctirad Slavik

Goethe University Frankfurt

Date Written: May 24, 2014

Abstract

We develop a production based asset pricing model with financially constrained firms to explain the observed high asset price volatility. Investment opportunities are scarce and firms face two shocks: classic productivity shocks and financial shocks that affect the tightness of the financial constraint. The source of asset price volatility in the model is the interaction between the scarcity of investment opportunities and time variation in the tightness of the financial constraint. We calibrate the model to the U.S. data and find that it generates a volatility in the price of equity comparable to the observed aggregate stock market volatility. The model also fits key aspects of the behavior of aggregate quantities, in particular, the volatility of aggregate consumption and investment.

Keywords: General Equilibrium, Business Cycles, Production Based Asset Pricing

JEL Classification: E20, E32, G12

Suggested Citation

Nezafat, Pedram and Slavik, Ctirad, Asset Prices and Business Cycles with Financial Shocks (May 24, 2014). Available at SSRN: https://ssrn.com/abstract=1571754 or http://dx.doi.org/10.2139/ssrn.1571754

Pedram Nezafat (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Ctirad Slavik

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1 (Campus Westend)
House of Finance, Room 3.49
Minneapolis, MN Hessen 55455
Germany
+49 (0)69 798 33808 (Phone)

HOME PAGE: http://www.wiwi.uni-frankfurt.de/profs/slavik/index.html

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
398
Abstract Views
3,681
rank
84,783
PlumX Metrics