Industrial Asset Pricing with Endogenous Business Cycles

36 Pages Posted: 29 Nov 2011 Last revised: 17 Jul 2014

Marcus M. Opp

University of California, Berkeley - Finance Group

Christine A. Parlour

University of California, Berkeley - Finance Group

Johan Walden

University of California, Berkeley - Finance Group

Date Written: December 11, 2011

Abstract

We develop a dynamic general equilibrium model with many different industries, in which firms set prices strategically in product markets. Our approach extends previous literature by endogenizing the market price of risk and allowing for more general risk structures. General equilibrium in the model is shown to exist under general conditions. Strategic interaction between firms amplifies business cycles, small changes in long-term growth rates can have drastic effects on the equilibrium outcome, whereas temporary changes in productivity have marginal impact, and the overall competitiveness of the economy only depends on long-term growth. A firm's expected returns are affected by the industrial environment in which it operates, in line with what has been observed in the empirical literature. Overall, our model suggests that industry characteristics should be informative about the expected returns of individual firms over the business cycle.

Suggested Citation

Opp, Marcus M. and Parlour, Christine A. and Walden, Johan, Industrial Asset Pricing with Endogenous Business Cycles (December 11, 2011). Available at SSRN: https://ssrn.com/abstract=1965388 or http://dx.doi.org/10.2139/ssrn.1965388

Marcus M. Opp (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States

Christine A. Parlour

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Johan Walden

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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