Debt, Equity and the Equity Price Puzzle

Riksbank Research Paper Series No. 138

Sveriges Riksbank Working Paper Series No. 314

13 Pages Posted: 19 May 2016

See all articles by Daria Finocchiaro

Daria Finocchiaro

Sveriges Riksbank - Research Division

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Date Written: December 2015

Abstract

We show that in a model with equity and debt financing, the specification of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact.

Keywords: liquidity shocks, collateral constraints, stock prices, co-movement

JEL Classification: E32, E44

Suggested Citation

Finocchiaro, Daria and Mendicino, Caterina, Debt, Equity and the Equity Price Puzzle (December 2015). Riksbank Research Paper Series No. 138. Available at SSRN: https://ssrn.com/abstract=2780395 or http://dx.doi.org/10.2139/ssrn.2780395

Daria Finocchiaro (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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