Investment-Specific Shocks, Business Cycles, and Asset Prices

SAFE Working Paper No. 129

36 Pages Posted: 14 Mar 2016

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

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Date Written: March 14, 2016

Abstract

We introduce long-run investment productivity risk in a two-sector production economy to explain the joint behavior of macroeconomic quantities and asset prices. Long-run productivity risk in both sectors, for which we provide economic and empirical justification, acts as a substitute for shocks to the marginal efficiency of investments in explaining the equity premium and the stock return volatility differential between the consumption and the investment sector. Moreover, adding moderate wage rigidities allows the model to reproduce the empirically observed positive co-movement between consumption and investment growth.

Keywords: General Equilibrium Asset Pricing, Production Economy, Long-Run Risk, Investment-Specific Shocks, Nominal Rigidities

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 (March 14, 2016). SAFE Working Paper No. 129 , Available at SSRN: https://ssrn.com/abstract=2747383 or http://dx.doi.org/10.2139/ssrn.2747383

Giuliano Curatola (Contact Author)

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

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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