Asset Prices in Production Economies with an Endogenous Extensive Margin

22 Pages Posted: 1 May 2016

See all articles by Jose Ignacio Lopez

Jose Ignacio Lopez

Universidad de los Andes, Colombia - Department of Economics

Date Written: July 31, 2015

Abstract

In economies that exhibit love-for-variety either in preferences or technology, the official consumer price index differs from the welfare-based price aggregator. This wedge implies that the stochastic discount factor should be adjusted to account for changes in the range of goods. This paper shows that a real business cycle model with endogenous entry fits aggregate quantities while featuring a higher risk premium when changes in growth variety are properly accounted. Moreover, adding the growth rate of establishments, as a proxy for growth variety, helps the standard consumption-based model to deliver lower pricing errors for the cross-section of stock returns.

Keywords: Extensive Margin, Entry, CCAPM, Equity Premium

JEL Classification: E32, G12.

Suggested Citation

Lopez, Jose Ignacio, Asset Prices in Production Economies with an Endogenous Extensive Margin (July 31, 2015). Available at SSRN: https://ssrn.com/abstract=2772463 or http://dx.doi.org/10.2139/ssrn.2772463

Jose Ignacio Lopez (Contact Author)

Universidad de los Andes, Colombia - Department of Economics ( email )

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