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

Leibniz Institute for Financial Research SAFE

Patrick Grüning

Bank of Lithuania - Center of Excellence for Finance and Economic Research (CEFER); Vilnius University - Faculty of Economics and Business Administration; Research Center SAFE

Christoph Meinerding

Deutsche Bundesbank

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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)

Leibniz Institute for Financial Research SAFE ( email )

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

Patrick Grüning

Bank of Lithuania - Center of Excellence for Finance and Economic Research (CEFER) ( email )

Totoriu g. 4
Vilnius, LT-01121
Lithuania
+370 5 2680 069 (Phone)

HOME PAGE: http://www.lb.lt/en/dr-patrick-gruning

Vilnius University - Faculty of Economics and Business Administration ( email )

Sauletekio al. 9 (II building)
Vilnius, LT-10222
Lithuania

HOME PAGE: http://www.evaf.vu.lt/en/

Research Center SAFE ( email )

Goethe University Frankfurt
Theodor-W.-Adorno Platz 3
Frankfurt am Main, D-60629
Germany

HOME PAGE: http://safe-frankfurt.de/research/researchers/researchers-details/showauthor/92-gruening.html

Christoph Meinerding

Deutsche Bundesbank ( email )

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

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